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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NO.: 0-20082
ALLIANCE BANCORP
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 36-3811768
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) I.D. No.)
ONE GRANT SQUARE, HINSDALE, ILLINOIS 60521
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (630) 323-1776
------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK PAR VALUE $0.01 PER SHARE
(TITLE OF CLASS)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, i.e., persons other than directors and executive officers of the
registrant, is $191,392,505 and is based upon the last sales price as quoted on
NASDAQ for March 13, 1998.
The Registrant had 8,022,147 shares of common stock outstanding as of March
13, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Part III-Portions of the Proxy Statement for the 1997 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1. BUSINESS.
GENERAL
On February 10, 1997, Hinsdale Financial Corporation, the holding company for
Hinsdale Federal Bank for Savings, and Liberty Bancorp, Inc., the holding
company for Liberty Federal Savings Bank, consummated their merger in a stock-
for-stock exchange. The resulting organization was renamed Alliance Bancorp
("the Company"). Liberty Federal Savings Bank was merged into Hinsdale Federal
Bank for Savings, and the resulting Bank operates under the name Liberty Federal
Bank ("the Bank").
The transaction was accounted for under the purchase method of accounting and
1.054 shares of Hinsdale Financial Corporation common stock were exchanged for
each share of Liberty Bancorp outstanding common stock. There were 3,930,405
shares of common stock of Hinsdale Financial Corporation issued for 3,733,013
shares of Liberty Bancorp common stock. Liberty Bancorp had total assets of
$680 million and deposits of $516 million at the date of the merger. The fair
value of the net assets acquired approximated the purchase price, accordingly;
no goodwill was recorded. Earnings for the year ended December 31, 1997
includes the earnings of Liberty Bancorp from the date of merger.
The Company is a registered savings and loan holding company incorporated
under the laws of the state of Delaware and is engaged in the business of
providing financial service products to the public through its wholly-owned
subsidiary, Liberty Federal Bank.
The Bank, a Federal savings bank chartered under the authority of the Office
of Thrift Supervision ("OTS"), originally was organized in 1934, and changed its
charter from a federal savings and loan association to a federal savings bank in
1991. The Bank is a member of the Federal Home Loan Bank ("FHLB") System and
its deposit accounts are insured to the maximum allowable amount by the Federal
Deposit Insurance Corporation ("FDIC"). The Bank is regulated by the OTS and
the FDIC and is further regulated by the Board of Governors of the Federal
Reserve System as to reserves required to be maintained against deposits and
certain other matters.
The Bank is a community-oriented company providing financial services through
fourteen full service retail banking facilities in Chicago, north and western
Cook County, and DuPage County in Illinois. The Bank offers a variety of
deposit products in an attempt to attract funds from the general public in
highly competitive market areas surrounding its offices. In addition to deposit
products, the Bank also offers its customers financial advice and security
brokerage services through INVEST Financial Corporation ("INVEST"). The Bank
invests its retail deposits primarily in mortgage and consumer loans, investment
securities and mortgage-backed securities, secured primarily by one-to four-
family residential loans.
The earnings of the Bank are primarily dependent on its net interest income,
which is the difference between the interest income earned on its loans,
mortgage-backed securities, and investment portfolios, and its cost of funds,
consisting of the interest paid on its deposits and borrowings.
On May 31, 1995, the Company acquired Preferred Mortgage Associates, Ltd.
("Preferred"), one of the largest mortgage brokers in the Chicago metropolitan
area. Preferred has six mortgage origination offices including its headquarters
in Downers Grove, Illinois. Established in 1987, Preferred brokered loans for
approximately twenty-five separate lenders in 1997. The Bank anticipates that
it will retain approximately 20% of Preferred's annual loan origination volume.
Financial results for Preferred are included on a consolidated basis from the
date of acquisition. Effective October 1, 1995, the Company transferred the
ownership of Preferred to the Bank. The acquisition of Preferred has resulted
in increases in both noninterest income and noninterest expense.
The Bank's earnings are also affected by noninterest income, including income
related to loan origination fees contributed by Preferred and the noncredit
consumer related financial services offered by the Bank, such as net commissions
received by the Bank from securities brokerage services, commissions from the
sale of insurance products, loan servicing income, fee income on transaction
accounts, and interchange fees from its shared ATMs. The Bank's noninterest
income has also been affected by gains from the sale of various assets,
including loans, mortgage-backed securities, investment securities, loan
servicing, and real estate. Noninterest expense consists
1
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principally of employee compensation, occupancy expense, federal deposit
insurance premiums, and other general and administrative expenses of the Bank
and Preferred.
On December 16, 1997, the Company entered into an Agreement and Plan of Merger
(the "Agreement") with Southwest Bancshares, Inc. ("Southwest"), which provides,
among other things, that (i) Southwest will be merged (the "Merger") with and
into Alliance Bancorp, with Alliance Bancorp as the surviving corporation, (ii)
Southwest Federal Savings and Loan Association of Chicago, the savings
association subsidiary of Southwest ("Southwest Federal"), will be merged with
and into Liberty Federal Bank, the savings bank subsidiary of Alliance Bancorp
("Liberty Federal") with Liberty Federal as the surviving institution, (iii)
each outstanding share of Southwest common stock issued and outstanding at the
effective time of the Merger will be converted into shares of common stock of
Alliance Bancorp in accordance with an "Exchange Ratio," as described below, and
(iv) each share of Alliance Bancorp's common stock issued and outstanding
immediately prior to the effective time of the Merger will remain an outstanding
share of common stock of Alliance Bancorp. The directors of Alliance Bancorp
and Southwest have entered into agreements to vote shares owned by them in favor
of the Agreement.
Under the Agreement, and subject to certain qualifications, the Exchange Ratio
will be as follows: (i) if the Alliance Bancorp Market Value (as defined in the
agreement) is less than or equal to $30.475 and greater than or equal to
$22.525, then 1.1981 shares of Alliance Bancorp Common Stock; (ii) if the
Alliance Bancorp Market Value is greater than $30.475 and less than or equal to
$35.00, then that number of shares of Alliance Bancorp Common Stock, determined
by dividing $36.5125 by the Alliance Bancorp Market Value; (iii) if the Alliance
Bancorp Market Value is greater than $35.00, then 1.0432 shares of Alliance
Bancorp Common Stock; and (iv) if the Alliance Bancorp Market Value is less than
$22.525, then that number of shares of Alliance Bancorp Common Stock, determined
by dividing $26.9875 by the Alliance Bancorp Market Value. Alliance Bancorp has
the right to terminate the Agreement if the Alliance Bancorp Market Value is
less than $19.875, unless Southwest provides notice pursuant to the Agreement
that it wants to proceed with the Merger, in which event the Exchange Ratio will
be 1.3579.
Consummation of the Merger is subject to certain conditions, including the
approval of stockholders of each of Alliance Bancorp and of Southwest, and the
receipt of all required regulatory approvals. It is expected that the Merger
will be completed prior to June 30, 1998.
MARKET AREA AND COMPETITION
The Bank's deposit gathering and lending areas include Chicago, north and
western Cook County, and DuPage County in Illinois, where the Bank's offices are
located. The Bank currently operates out of fourteen full service locations.
The Bank's home office is located in Hinsdale, Illinois. Management believes
that all of its offices are located in communities that can generally be
characterized as stable residential neighborhoods of predominantly one and two
family residences.
The Company faces significant competition both in making mortgage and consumer
loans and in attracting deposits. The Company's competition for loans comes
principally from savings and loan associations, savings banks, mortgage banking
companies, insurance companies and commercial banks. Its most direct
competition for deposits has historically come from savings and loan
associations, savings banks, commercial banks and credit unions. The Company
faces additional competition for deposits from short-term money market funds and
other corporate and government securities funds and from other financial
institutions such as brokerage firms and insurance companies.
FUTURE ACQUISITION AND EXPANSION ACTIVITY
Both nationally and in the Chicago area, the banking industry is undergoing a
period of consolidation marked by numerous mergers and acquisitions. We may
from time to time be presented with additional opportunities to acquire
institutions or bank branches that could expand and strengthen our market
position. If such an opportunity arises, we may from time to time engage in
discussions or negotiations and we may conduct a business investigation of a
target institution. Acquisitions typically involve the payment of a premium
over book and market values, and therefore, some dilution of the Company's book
value and net income per share may occur in connection with the future
acquisition.
2
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ITEM 2. PROPERTIES.
The Company is located and conducts its business at the Bank's Main Office at
One Grant Square, Hinsdale, Illinois, which the Bank leases. In addition to the
Main Office, the Bank leases branch locations at 2745 W. Maple Avenue, Lisle,
Illinois; 6 S. Walker Avenue, Clarendon Hills, Illinois; the Brush Hill Depot,
Hinsdale, Illinois; 138 N. York Road, Elmhurst, Illinois; 5240 N. Pulaski, Unit
C, Chicago, Illinois; 936 N. Harlem Ave., Glenview, Illinois; 4147 N. Harlem
Ave., Norridge, Illinois; and 6014 W. Dempster Street, Morton Grove, Illinois.
The Bank owns branch offices located at 810 S. Oak Park Avenue, Oak Park,
Illinois; 6301 S. Cass Avenue, Westmont, Illinois; 115 High Street, West
Chicago, Illinois; 7525 Madison Street, Forest Park, Illinois; 5700 N. Lincoln
Ave., Chicago, Illinois; and 5650 N. Lincoln Ave., Chicago, Illinois. The Bank
also owns the building, but leases the land at its branch at 1125 S. York Road,
Bensenville, Illinois and owns an office building at 19 W. 63rd Street,
Westmont, Illinois, which Preferred leases from the Bank. Preferred conducts
its business through six office locations in the Chicago area. All offices are
leased, one of which as previously mentioned, is leased from the Bank. The
Company has plans to open a full service facility in Naperville, Illinois, in
late fall of 1998. See Note 7 of the "Notes to Consolidated Financial
Statements" for the net book value of the Company's premises and equipment and
Note 13 for liability under lease commitments.
ITEM 3. LEGAL PROCEEDINGS.
GOODWILL LITIGATION
On August 30, 1995, the U. S. Court of Appeals for the Federal Circuit
rejected the federal government's appeal of a 1992 U. S. Court of Claims' ruling
that the government breached its contract with Glendale Federal Bank regarding
supervisory goodwill and that the government is liable for damages. The
government subsequently appealed this decision to the United States Supreme
Court and on July 1, 1996, the Supreme Court by a vote of 7 to 2, ruled that the
government had breached its contract. On December 29, 1992, the Bank filed a
similar action against the federal government in the U. S. Claims Court seeking
damages in connection with the supervisory goodwill arising from the Bank's 1982
merger of North America Federal Savings. The Bank based its decision to
complete that merger upon the assurance that the supervisory goodwill resulting
from the merger could be included in regulatory capital and be amortized over a
life of forty years. The Complaint alleges that the enactment of the Financial
Institutions Reform, Recovery and Enforcement Act of 1989, and the regulations
promulgated thereunder, breached the federal government's contract with the
Bank.
On December 22, 1997, the U. S. Claims Court ruled in favor of Cal Fed
Bancorp, Inc. and three other thrift investors, rejecting a series of legal
defenses offered by the federal government and urged the government to settle
dozens of lawsuits by savings and loans. The ruling rejected eleven different
arguments the Justice Department had made about why the Court should throw out
the lawsuits. The U. S. Claims Court also gave the government sixty days to
come up with a reason why the Court should not hold the government liable for as
much as $20 billion in potential claims from more than one hundred twenty
lawsuits over the accounting procedure known as "supervisory goodwill." The
Court's ruling involving Cal Fed and three other groups of thrift investors was
designed to resolve common legal questions that have been raised in many of the
lawsuits. The Justice Department is reviewing the Court's ruling.
At this time management cannot predict the outcome of this pending litigation.
No assurance can be given that a favorable court ruling will be rendered as to
the Bank's claims, or the amount, if any, to be recovered by the Bank or the
timing of any recovery.
OTHER LITIGATION
In addition to the matter described above, the Company or its subsidiaries are
involved as plaintiff or defendant in various legal actions incidental to their
business, none of which is believed by management to be material to the
consolidated financial condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
3
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Alliance Bancorp's common stock is traded on the National Association of
Securities Dealer's Automated Quotation/National Market System (NASDAQ/NMS)
under the symbol "ABCL." As of December 31, 1997, the Holding Company had
approximately 786 stockholders of record (not including the number of persons or
entities holding stock in nominee or street name through various brokerage
firms) and 8,022,147 outstanding shares of common stock. The table shows the
reported high and low sale prices of the common stock during the years ended
December 31, 1997 and September 30, 1996, and the transition quarter ended
December 31, 1996, respectively.
<TABLE>
<CAPTION>
1997 1996
High Low High Low
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<S> <C> <C> <C> <C>
First quarter $ 21.17 16.50 14.83 14.00
Second quarter 20.50 18.33 15.00 14.00
Third quarter 24.31 19.92 17.83 14.00
Fourth quarter 28.50 23.94 18.00 14.50
Transition quarter - - 18.50 15.50
</TABLE>
All share prices have been adjusted to reflect the 50% common stock split
effected in the form of a stock dividend declared on August 22, 1997.
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ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
At At At September 30,
Dec. 31, Dec. 31, ---------------------------------------
(Dollars in thousands, except per share data) 1997 1996 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Data:
Total assets $ 1,354,585 667,964 650,897 703,707 643,289 537,832
Investment securities 91,475 1,998 1,998 1,998 22,734 37,673
Mortgage-backed securities 213,957 5,140 5,367 7,147 30,701 162,349
Loans receivable, net 957,897 609,371 590,722 614,371 544,284 286,273
Real estate 2,510 1,586 1,249 1,872 6,030 6,608
Deposits 1,022,614 462,869 452,472 445,505 419,436 437,632
Collateralized mortgage obligations 1,065 2,243 2,542 4,353 6,063 11,278
Borrowed funds 173,531 131,900 128,949 185,339 160,857 37,029
Stockholders' equity 130,938 56,626 55,471 51,977 46,716 41,516
Book value per share (1) $ 16.32 14.01 13.72 12.93 11.76 10.49
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
For The
For The Three
Year Months
Ended Ended For The Year Ended September 30,
Dec. 31, Dec. 31, -----------------------------------
1997 1996 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income $ 92,628 11,098 45,701 45,944 37,028 34,024
Interest expense 56,117 6,824 28,967 28,442 18,968 17,933
- -------------------------------------------------------------------------------------------------------------------------
Net interest income 36,511 4,274 16,734 17,502 18,060 16,091
Less provision for loan losses - - 50 185 125 300
- -------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 36,511 4,274 16,684 17,317 17,935 15,791
- -------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Gain (loss) on sales of loans receivable,
mortgage-backed securities and investment securities (153) 70 452 344 369 1,446
Gain on sales of real estate and other assets - - 61 300 - -
Other 15,617 3,086 12,434 6,104 4,713 4,350
- -------------------------------------------------------------------------------------------------------------------------
Total noninterest income 15,464 3,156 12,947 6,748 5,082 5,796
- -------------------------------------------------------------------------------------------------------------------------
Noninterest expense:
General and administrative expenses 35,252 5,666 25,696 16,697 15,312 13,915
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes 16,723 1,764 3,935 7,368 7,705 7,672
Income tax expense 6,474 685 861 2,909 2,989 3,074
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 10,249 1,079 3,074 4,459 4,716 4,598
- -------------------------------------------------------------------------------------------------------------------------
Basic earnings per share (1) $ 1.35 0.27 0.76 1.12 1.19 1.14
Diluted earnings per share (1) $ 1.26 0.26 0.73 1.07 1.13 1.10
- -------------------------------------------------------------------------------------------------------------------------
Cash dividends declared per common share $ 0.395 - - - - -
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
5
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<TABLE>
<CAPTION>
At or For
At or For The Three
The Year Months At or For The Year Ended
(continued) Ended Ended September 30,
Dec. 31, Dec. 31, ----------------------------------------------
(Dollars in thousands, except share amounts) 1997 1996 (2) 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Ratios And Other Data:
Average assets $ 1,298,922 649,307 670,430 677,573 584,039 522,837
Return on average assets 0.79% 0.66 0.46 0.66 0.81 0.88
Return on average equity 8.54 7.72 5.69 9.07 10.73 11.61
Average stockholders' equity to average assets 9.24 8.61 8.06 7.26 7.53 7.57
Stockholders' equity to total assets 9.67 8.48 8.52 7.39 7.26 7.72
Tangible capital to total assets (Bank only) 8.40 7.83 7.85 7.15 7.09 7.54
Leverage capital to total assets (Bank only) 8.50 8.05 8.07 7.15 7.09 7.54
Risk-based capital ratio (Bank only) 16.48 13.43 13.72 13.64 13.85 17.83
Interest rate spread during the period 2.55 2.41 2.19 2.35 2.98 3.05
Net yield on average interest-earning assets 2.93 2.72 2.58 2.67 3.22 3.25
General and administrative expenses
to average assets 2.71 3.49 3.83 2.46 2.62 2.66
Non-performing loans to total loans 0.31 0.19 0.16 0.21 0.18 0.32
Non-performing assets to total assets 0.27 0.26 0.17 0.18 0.85 1.04
Average interest-earning assets to average
interest-bearing liabilities 1.08 X 1.08 1.09 1.07 1.07 1.06
Weighted average shares outstanding (1):
Basic 7,569,751 4,042,628 4,029,553 3,993,867 3,962,106 4,018,664
Diluted 8,114,996 4,224,758 4,199,590 4,159,447 4,185,420 4,181,133
Loan originations $ 689,512 129,397 542,578 262,154 403,414 228,965
Full-service customer service facilities 14 9 9 9 9 9
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) All share amounts have been adjusted to reflect the 50% common stock split
effected in the form of a stock dividend declared on August 22, 1997 and
earnings per share have been restated to adopt the provisions of SFAS No.
128, "Earnings per Share."
(2) Ratios were calculated on an annualized basis, as applicable.
6
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND
SEPTEMBER 30, 1996
GENERAL
The Company changed its fiscal year to coincide with the calendar year,
compared to the September 30 fiscal year it used in the past. The Company
completed its merger with Liberty Bancorp on February 10, 1997. The transaction
was accounted for using the purchase method of accounting, therefore, the
comparisons to previously reported periods result in changes primarily due to
the merger with Liberty Bancorp, Inc. The operating results for the year ended
December 31, 1997 include the combined entities from the date of merger.
Net income totaled $10.2 million, or $1.26 per diluted share for the year
ended December 31, 1997, compared to $3.1 million, or $0.73 per diluted share
for the year ended September 30, 1996. Excluding the one-time Savings
Association Insurance Fund ("SAIF") assessment, net income totaled $4.8 million,
or $1.14 per diluted share for the year ended September 30, 1996. Net interest
income for the year ended December 31, 1997 was $36.5 million, an increase of
$19.8 million.
INTEREST INCOME
Interest income for the year ended December 31, 1997 totaled $92.6 million,
an increase of $46.9 million from the year ended September 30, 1996. The
increase in interest income was due to an increase in interest-earning assets
and to a lesser extent by an increase in the average yield. Interest income on
mortgage loans increased $25.4 million to $65.3 million from the prior year. The
average mortgage loan portfolio when comparing year to year increased
$308.7 million, primarily as a result of the merger. The average yield on the
mortgage loan portfolio increased to 7.51% for the year ended December 31, 1997,
from 7.11% for the 1996 year. The increase in yield was primarily due to
additional interest income of $1.7 million received on two large loans that were
settled and paid off. The average balance of home equity lines of credit
increased $40.8 million, or 121%, to $74.6 million for the year ended
December 31, 1997. This increase resulted in an increase in interest income of
$3.2 million. The Bank has determined to place additional emphasis on expanding
its portfolio of home equity lines of credit, the interest rates on which adjust
with the prime rate. An increase in home equity lines of credit is intended to
enhance the Bank's interest rate spread and its interest rate risk management.
The increase in the average consumer loan and lease portfolio of $26.3 million
for the year ended December 31, 1997 is primarily the result of the lease
portfolio acquired through the merger. The average balance of the mortgage-
backed securities portfolio increased $160.5 million to $167.8 million from the
prior year. The increase in the average mortgage-backed securities portfolio was
primarily due to the merger. Interest income on the mortgage-backed securities
portfolio increased $11.1 million from the prior year. The average balance of
the investment securities portfolio increased $69.7 million to $79.7 million
from the prior year, primarily as a result of the merger. Interest income on the
investment securities portfolio increased $5.2 million from the prior year.
INTEREST EXPENSE
Interest expense for the year totaled $56.1 million, an increase of $27.2
million from the prior year. The increase in interest expense was due to an
increase in interest-bearing liabilities due to the merger and to a lesser
extent by an increase in the average cost of interest-bearing liabilities.
Interest expense on deposit accounts increased $24.9 million to $44.6 million
for the year. The average cost of deposits for the year was 4.64%, an increase
from the average cost of 4.30% for the 1996 year. The average deposit base
increased $502.4 million to $959.9 million for the year ended December 31, 1997.
The deposit base and the interest paid on deposits continues to be affected by
alternative investment products and competition within the Company's market
areas. For the year, the Company recorded interest expense on borrowed funds of
$11.4 million on an average balance of $187.5 million at an average cost of
6.06%. This compares to interest expense of $8.8 million on an average balance
of $136.7 million at an average cost of 6.47% for the year ended 1996. The
average balance of the Collateralized Mortgage Obligations ("CMO") bonds
outstanding decreased $1.7 million, or 52.6%, to $1.5 million for the year ended
December 31, 1997 compared to the 1996 year. The average cost of the CMO bonds
for the year ended 1997 was 12.24%, a decrease from the average cost of 13.34%
for the year ended 1996. This decrease was due to adjustments made to the
discount on the bonds for changes in the estimated average maturities of the
mortgage-backed securities collateralizing the bonds.
7
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NET INTEREST INCOME
Net interest income for the year ended December 31, 1997 increased $19.8
million, to $36.5 million from the 1996 year, primarily as a result of the
merger. Both the average yield on interest-earning assets and the average cost
of interest-bearing liabilities increased when comparing 1997 and 1996. The
average yield on interest-earning assets increased to 7.43% from 7.04%. The
Bank continues to concentrate on improving asset yields, specifically through
increased commercial and consumer lending and through the purchase of investment
and mortgage-backed securities. The Bank has been able to maintain and increase
its deposit base while not significantly increasing its cost over the last two
years despite intense competition from other depositories and mutual funds. The
average cost of interest-bearing liabilities has increased slightly from 4.85%
to 4.88%.
PROVISION FOR LOAN LOSSES
Based on management's evaluation of the loan portfolio, no provision for
loan losses was recorded during the year ended December 31, 1997. The provision
for loan losses was $50,000 for year ended September 30, 1996. At December 31,
1997, the ratio of non-performing loans to total loans was 0.31% compared to
0.16% at September 30, 1996. The allowance for loan losses represents 0.56% of
total loans receivable at December 31, 1997 compared to 0.41% at September 30,
1996. Based on management's evaluation of the loan portfolio, past loan loss
experience, and known and inherent risks in the portfolio, management believes
that the allowance is adequate.
NONINTEREST INCOME
Total noninterest income for the year ended December 31, 1997 was $15.5
million, an increase of $2.5 million from the 1996 year. Net losses on sales of
loans and mortgage-backed securities totaled $153,000 for the year, compared to
net gains of $452,000 recorded in 1996. In 1997, the Bank sold $59 million of
adjustable-rate mortgage loans, recording a loss of $391,000. The loan sale and
subsequent reinvestment was part of a restructuring of the loan portfolio to
improve the portfolio yield. In 1996, the Bank sold its credit card portfolio,
recording a gain of $183,000. The increase in other fees and commissions of
$3.0 million from $10.4 million in 1996 to $13.4 million in 1997, is primarily
attributable to the increase of $1.9 million in origination fees contributed by
Preferred. ATM fees increased $985,000 from the prior year, primarily due to
surcharging. Other noninterest income decreased $362,000. In 1996, the Bank
received tax refunds of $392,000 and $53,000 from the redemption of an equity
investment.
NONINTEREST EXPENSE
Noninterest expense for the year ended December 31, 1997 totaled $35.3
million. Excluding the one-time SAIF assessment of $2.8 million recorded in
1996, noninterest expense increased $12.4 million. The increase in noninterest
expense is primarily due to the combined operations of the Banks from the date
of acquisition. Noninterest expense for the current year includes $1.2 million
in pretax non-recurring expenses due to the acquisition of Liberty Bancorp.
Compensation and benefits increased $6.4 million, to $19.2 million for 1997.
The increase is primarily due to the combined operations from the date of
acquisition. Occupancy expense for the year ended December 31, 1997 totaled
$4.3 million, an increase of $1.4 million from the 1996 year. The increase is
primarily due to the combined operations from the date of acquisition. All
other components of noninterest expense increased $4.6 million to $11.7 million,
exclusive of the one-time SAIF assessment of $2.8 million. This increase is
primarily the result of the combined operations from the date of acquisition.
INCOME TAX PROVISION
The provision for income taxes for the year ended December 31, 1997 was
$6.5 million. The effective tax rate for the 1997 year was 38.7% compared to
21.9% for the 1996 year. The lower effective tax rate for the 1996 year was the
result of the reversal of the valuation allowance on deferred tax assets, which
was no longer deemed necessary.
8
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COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND
SEPTEMBER 30, 1995
GENERAL
Net income totaled $3.1 million, or $0.73 per diluted share for the year
ended September 30, 1996, compared to $4.5 million, or $1.07 per diluted share
for the year ended September 30, 1995. Excluding the one-time Savings
Association Insurance Fund ("SAIF") assessment, net income totaled $4.8 million,
or $1.14 per diluted share for the year ended September 30, 1996. Net interest
income for the year ended September 30, 1996 was $16.7 million, a decrease of
$768,000, or 4.4%.
INTEREST INCOME
Interest income for the year ended September 30, 1996 totaled $45.7 million,
a decrease of $243,000, or 0.5% from the prior year. Interest income on mortgage
loans increased $680,000 to $39.9 million from the prior year. The average
mortgage loan portfolio when comparing year to year increased $2.3 million, or
0.4%. The average yield on the mortgage loan portfolio increased to 7.11% for
the year ended September 30, 1996, from 7.02% for the 1995 year. The average
balance of home equity lines of credit increased $15.4 million, or 84.0%, to
$33.8 million for the year ended September 30, 1996. This increase resulted in
an increase in interest income of $1.1 million. The Bank has determined to place
additional emphasis on expanding its portfolio of home equity lines of credit,
the interest rates on which adjust with the prime rate. An increase in home
equity lines of credit is intended to enhance the Bank's interest rate spread
and its interest rate risk management. The decrease in the average consumer loan
portfolio of $4.2 million for the year ended September 30, 1996 is primarily
related to the sale of the credit card portfolio. The Bank recorded a gain on
the sale of $183,000 in the second quarter of fiscal 1996. The average balance
of the mortgage-backed securities portfolio decreased $13.4 million to $7.3
million from the prior year. The decrease in the average mortgage-backed
securities portfolio was primarily due to the sale of $20.2 million during
fiscal 1995, resulting in a decrease of interest income of $1.0 million. The
average balance of the investment securities portfolio decreased $10.2 million
to $10.1 million from the prior year. This decrease was primarily related to the
sales and maturities in the portfolio in fiscal 1995, resulting in a decrease in
interest income of $530,000.
INTEREST EXPENSE
Interest expense for the year totaled $29.0 million, an increase of
$525,000, or 1.8%, from the prior year. Interest expense on deposit accounts
increased $2.3 million, or 13.0%, to $19.7 million for the year. The average
cost of deposits for the year was 4.30%, an increase from the average cost of
4.02% for the 1995 year. The average deposit base increased $24.3 million, or
5.6%, to $457.5 million for the year ended September 30, 1996. The deposit base
continues to be affected by alternative investment products and competition
within the Company's market areas. For the year, the Company recorded interest
expense on borrowed funds of $8.8 million on an average balance of $136.7
million at an average cost of 6.47%. This compares to interest expense of
$10.4 million on an average balance of $171.5 million at an average cost of
6.05% for the year ended 1995. The decrease in the average balance of borrowed
funds of $34.8 million was partial offset by the increase in the average deposit
base of $24.3 million. The average balance of the Collateralized Mortgage
Obligations ("CMO") bonds outstanding decreased $1.7 million, or 34.0%, to
$3.2 million for the year ended September 30, 1996 compared to the 1995 year.
The average cost of the CMO bonds for the year ended 1996 was 13.34%, an
increase from the average cost of 12.87% for the year ended 1995. This increase
was due to adjustments made to the discount on the bonds for changes in the
estimated average maturities of the mortgage-backed securities collateralizing
the bonds.
NET INTEREST INCOME
Net interest income for the year ended September 30, 1996 decreased
$768,000, or 4.4%, to $16.7 million from the comparable 1995 year. Both the
average yield on interest-earning assets and the average cost of interest-
bearing liabilities increased when comparing 1996 and 1995. The average yield on
interest-earning assets has remained stable over the past two years, increasing
slightly from 7.02% to 7.04%. The Bank continues to concentrate on improving
asset yields, specifically through increased consumer lending. However, early in
1996, the Bank sold its higher yielding credit card portfolio due to high costs
and charge-offs. Additionally, first year discounts on new home equity lines of
credit have slowed the improvement in loan income. The Bank has been able to
maintain and
9
<PAGE>
increase its deposit base over the last two years despite intense competition
from other depositories and mutual funds. The average cost of interest-bearing
liabilities has increased from 4.67% to 4.85%. Each successive quarter of 1996
has shown cost improvement through lower interest rates compared to 1995.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $50,000 for year ended September 30, 1996
compared to $185,000 for the 1995 year. At September 30, 1996, the ratio of
non-performing loans to total loans was 0.16% compared to 0.21% at September 30,
1995. The allowance for loan losses represents 0.41% of total loans receivable
at September 30, 1996 compared to 0.42% at September 30, 1995. Based on
management's evaluation of the loan portfolio, past loan loss experience, and
known and inherent risks in the portfolio, management believes that the
allowance is adequate.
NONINTEREST INCOME
Total noninterest income for the year ended September 30, 1996 was $12.9
million, an increase of $6.2 million from the 1995 year. Gain on sales of loans
and mortgage-backed securities totaled $452,000 for the year, compared to
$362,000 recorded in 1995. In fiscal 1996, the Bank sold its credit card
portfolio, recording a gain on the sale of $183,000. The increase in fees and
commissions of $5.8 million is primarily attributable to the full year of
origination fees contributed by Preferred of $7.8 million compared to $2.3
million in 1995. In fiscal 1995, the Bank sold a shopping center in Orland
Park, Illinois, recording a gain on sale of real estate of $299,000 compared to
gains on sales of real estate of $61,000 recorded in fiscal 1996. Other
noninterest income increased $826,000. In fiscal 1995, the Bank wrote-off its
equity investment of $381,600 in The RESCORP Companies as compared to tax
refunds of $392,000 and $53,000 from the redemption of an equity investment
recorded in fiscal 1996.
NONINTEREST EXPENSE
Noninterest expense for the year ended September 30, 1996 totaled $25.7
million. Excluding the one-time SAIF assessment of $2.8 million, noninterest
expense increased $6.2 million, or 37.0% from the 1995 year. Compensation and
benefits increased $3.7 million, or 41.1%, to $12.8 million for 1996. The
increase is primarily related to the full year of operations of Preferred which
totaled $5.7 million compared to $1.6 million for the 1995 year. Occupancy
expense for the year ended September 30, 1996 totaled $3.0 million, an increase
of $821,000, or 38.0% from the 1995 year. Of the increase, $325,339 is due to
the amortization in fiscal 1995 of $390,407 compared to $65,068 in fiscal 1996
of the deferred gain on the sale of Bank premises in 1991 as a result of lease
back arrangements on a portion of the property sold which offset rental expense.
The remaining increase is primarily attributable to the full year of operations
of Preferred. All other components of noninterest expense increased $1.6
million, or 29.7%, to $7.1 million. This increase is primarily the result of
the full year of operations of Preferred.
INCOME TAX PROVISION
The provision for income taxes for the year ended September 30, 1996 was
$861,000. The effective tax rate for the 1996 year was 21.9% compared to 39.5%
for the 1995 year. This decrease is primarily related to the reversal of the
valuation allowance on deferred tax assets, which was no longer deemed
necessary.
10
<PAGE>
AVERAGE BALANCE SHEETS
The following table sets forth certain information relating to the Company's
Consolidated Statements of Financial Condition and reflects the average yield on
assets and the average cost of liabilities for the periods indicated. Such
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods shown. Average
balances are derived from average daily balances and include non-performing
loans. The yields and costs include fees which are considered adjustments to
yields.
<TABLE>
<CAPTION>
Year Ended Year Ended September 30,
---------------------------- --------------------------------------------------------
December 31, 1997 1996 1995
---------------------------- --------------------------- ---------------------------
Average Average Average
Average Yield/ Average Yield/ Average Yield/
(Dollars in thousands) Balance Interest Cost Balance Interest Cost Balance Interest Cost
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans, net $ 868,968 65,293 7.51% 560,251 39,864 7.11% 557,934 39,184 7.02%
Home equity lines of credit 74,558 5,951 7.98 33,753 2,798 8.29 18,343 1,678 9.15
Consumer loans and leases 34,188 2,642 7.73 7,847 742 9.46 12,066 1,376 11.40
Mortgage-backed securities 167,768 11,664 6.95 7,309 603 8.25 20,693 1,614 7.80
Interest-bearing deposits 20,398 1,122 5.50 29,964 1,033 3.45 25,281 901 3.56
Federal funds sold 267 15 5.62 - - - - - -
Commercial paper 669 37 5.53 - - - - - -
Investment securities 79,710 5,904 7.41 10,053 661 6.57 20,221 1,191 5.89
- -----------------------------------------------------------------------------------------------------------------------
Total interest-earning
assets 1,246,526 92,628 7.43 649,177 45,701 7.04 654,538 45,944 7.02
Noninterest-earning assets 52,396 21,253 23,035
- -----------------------------------------------------------------------------------------------------------------------
Total assets $ 1,298,922 670,430 677,573
- -----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing
liabilities:
Deposits:
Savings accounts $ 791,269 41,316 5.22% 344,780 17,543 5.09% 317,834 15,027 4.72%
NOW noninterest-bearing
accounts 41,718 - - 35,311 - - 31,423 - -
NOW interest-bearing
accounts 48,960 783 1.60 22,861 364 1.59 22,875 381 1.67
Money market accounts 77,974 2,465 3.16 54,521 1,784 3.27 61,045 2,024 3.32
- -----------------------------------------------------------------------------------------------------------------------
Total deposits 959,921 44,564 4.64 457,473 19,691 4.30 433,177 17,432 4.02
Funds borrowed:
Borrowed funds 187,534 11,366 6.06 136,740 8,846 6.47 171,521 10,382 6.05
Collateralized mortgage
obligations 1,528 187 12.24 3,224 430 13.34 4,881 628 12.87
- -----------------------------------------------------------------------------------------------------------------------
Total funds borrowed 189,062 11,553 6.11 139,964 9,276 6.63 176,402 11,010 6.24
- -----------------------------------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 1,148,983 56,117 4.88 597,437 28,967 4.85 609,579 28,442 4.67
Other liabilities 29,893 18,955 18,805
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities 1,178,876 616,392 628,384
Stockholders' equity 120,046 54,038 49,189
- -----------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $ 1,298,922 670,430 677,573
- -----------------------------------------------------------------------------------------------------------------------
Net interest
income/interest rate
spread 36,511 2.55% 16,734 2.19% 17,502 2.35%
- -----------------------------------------------------------------------------------------------------------------------
Net interest-earning
assets/net
interest margin $ 97,543 2.93% 51,740 2.58% 44,959 2.67%
- -----------------------------------------------------------------------------------------------------------------------
Interest-earning assets to
interest-bearing
liabilities 1.08x 1.09x 1.07x
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
At December 31,
1997
---------------------
Yield/
(Dollars in thousands) Balance Cost
- -------------------------------------------------------
<S> <C> <C> <C>
ASSETS:
Interest-earning assets:
Mortgage loans, net $ 829,526 7.62%
Home equity lines of credit 81,499 8.10
Consumer loans and leases 46,872 7.99
Mortgage-backed securities 213,957 7.24
Interest-bearing deposits 33,784 6.47
Federal funds sold - -
Commercial paper - -
Investment securities 104,330 7.46
- -------------------------------------------------------
Total interest-earning
assets 1,309,968 7.56
Noninterest-earning assets 44,617
- -------------------------------------------------------
Total assets $ 1,354,585
- -------------------------------------------------------
LIABILITIES AND
STOCKHOLDERS' EQUITY:
Interest-bearing
liabilities:
Deposits:
Savings accounts $ 856,182 5.52%
NOW noninterest-bearing
accounts 41,159 -
NOW interest-bearing
accounts 50,158 1.47
Money market accounts 75,115 3.32
- -------------------------------------------------------
Total deposits 1,022,614 4.92
Funds borrowed:
Borrowed funds 173,531 6.00
Collateralized mortgage
obligations 1,065 12.81
- -------------------------------------------------------
Total funds borrowed 174,596 6.04
- -------------------------------------------------------
Total interest-bearing
liabilities 1,197,210 5.08
Other liabilities 26,437
- -------------------------------------------------------
Total liabilities 1,223,647
Stockholders' equity 130,938
- -------------------------------------------------------
Total liabilities and
stockholders' equity $ 1,354,585
- -------------------------------------------------------
Net interest
income/interest rate
spread 2.48%
- -------------------------------------------------------
Net interest-earning
assets/net
net interest margin
- -------------------------------------------------------
Interest-earning assets to
interest-bearing
liabilities
- -------------------------------------------------------
</TABLE>
11
<PAGE>
RATE/VOLUME ANALYSIS
The following table presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate), (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume), and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Year Ended December 31, 1997 Year Ended September 30, 1996
Compared To Compared To
Year Ended September 30, 1996 Year Ended September 30, 1995
-----------------------------------------------------------------
Increase (Decrease) Increase (Decrease)
In Net Interest Income In Net Interest Income
Due To Due To
-----------------------------------------------------------------
(In thousands) Volume Rate Net Volume Rate Net
- -------------------------------------------------------------------------------------------------------
<S> <C><C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage loans, net $ 23,073 2,356 25,429 167 513 680
Home equity lines of credit 3,262 (109) 3,153 1,291 (171) 1,120
Consumer loans and leases 2,060 (160) 1,900 (427) (207) (634)
Mortgage-backed securities 11,171 (110) 11,061 (1,099) 88 (1,011)
Interest-bearing deposits (398) 487 89 161 (29) 132
Investment securities 5,188 92 5,280 (655) 125 (530)
Federal funds sold 15 - 15 - - -
- -------------------------------------------------------------------------------------------------------
Total 44,371 2,556 46,927 (562) 319 (243)
- -------------------------------------------------------------------------------------------------------
INTEREST-BEARING LIABILITIES:
Deposits 23,203 1,670 24,873 1,008 1,251 2,259
Funds borrowed 3,051 (774) 2,277 (2,388) 654 (1,734)
- -------------------------------------------------------------------------------------------------------
Total 26,254 896 27,150 (1,380) 1,905 525
- -------------------------------------------------------------------------------------------------------
Net change in net interest income $ 18,117 1,660 19,777 818 (1,586) (768)
- -------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
FINANCIAL CONDITION
At December 31, 1997, total assets of the Company were $1.4 billion, an
increase of $704 million, from 1996. The increase in assets is essentially
related to the merger. Liberty Bancorp had $680 million in assets at the date
of merger.
The Company's $958 million loan portfolio consists primarily of mortgage
loans on residential real estate. Loans held for sale of $45 million at December
31, 1997, represent loans originated for delivery to investors by Preferred, or
for securitization and sale into the secondary market by the Bank. Home equity
lines of credit, commercial leases and consumer loans represent $124 million, or
12.8% of the loan portfolio. The Company originated and purchased $690 million
in loans during 1997 offset by sales of $603 million and cash repayments of
$233 million.
Deposits increased $570 million to $1.0 billion at December 31, 1997.
Liberty Bancorp had $516 million in deposits at the date of merger. Borrowings
increased by $45 million, which were primarily used to fund purchases for the
investment and mortgage-backed securities portfolio.
Stockholders' equity increased $75.5 million to $130.9 million at
December 31, 1997. The increase was due to earnings of $10.2 million and the
issuance of common stock for the acquisition of Liberty Bancorp of $64.6
million, offset by cash dividends declared of $3.2 million and the repayment of
the ESOP loan of $984,000. The Company issued 3,930,405 shares of common stock
in exchange for 3,733,013 shares of Liberty Bancorp outstanding common stock as
part of the merger. At December 31, 1997, the number of common shares
outstanding was 8,022,147 and the book value per common share outstanding was
$16.32. On August 22, 1997, the Company declared a 50% stock split effected in
the form of a stock dividend and issued 2,673,315 shares.
ASSET/LIABILITY MANAGEMENT
The Company's asset and liability management strategy attempts to minimize
the risk of a significant decrease in net interest income caused by changes in
the interest rate environment without penalizing current income. Net interest
income, the primary source of the Company's earnings, is affected by interest
rate movements. To mitigate the impact of changes in interest rates, a balance
sheet must be structured so that repricing opportunities exist for both assets
and liabilities in approximately equivalent amounts at basically the same time
intervals.
The Company seeks to reduce the volatility of its net interest income by
managing the relationship of interest rate sensitive assets to interest rate
sensitive liabilities. To accomplish this, the Company has attempted to
increase the percentage of assets, whose interest rates adjust more frequently,
and to reduce the average maturity of such assets. A principal focus in recent
years, has been the origination of adjustable-rate residential real estate loans
and consumer loans, which generally have shorter maturities than fixed-rate
residential real estate loans. The Company also originates shorter maturity
fixed-rate commercial real estate loans and purchases commercial leases, which
generally mature or reprice more quickly than fixed-rate residential real estate
loans.
However, adjustable-rate loans are nearly as likely to refinance in low
interest rate environments as fixed-rate loans. Often, interest rate cycles
allow for these refinancings before the adjustable-rate loans can adjust to
fully indexed market rates. In such declining interest rate environments, that
result in high levels of loan refinancings, the Company may decide to acquire
longer fixed-rate mortgage loans or mortgage-backed securities. To provide an
acceptable level of interest rate risk, the Company will implement a funding
strategy using long-term Federal Home Loan Bank borrowings. Imbalances in
repricing opportunities at any point in time constitute an interest sensitivity
gap, which is the difference between interest sensitive assets and interest
sensitive liabilities. These static measurements do not reflect the results of
any potential activity and are best used as early indicators of potential
interest rate exposures.
As part of its asset/liability strategy, the Company has implemented a
policy to maintain its cumulative one-year interest sensitivity gap ratio within
a range of (15%) to 15% of total assets, which reflects the current interest
rate environment and allows the Company to maintain an acceptable net interest
rate spread. The gap ratio will fluctuate as a result of market conditions and
management's expectation of future interest rate trends.
13
<PAGE>
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at December 31, 1997, which are
anticipated by the Company to reprice or mature in each of the future time
periods shown. Except as stated below, the amounts of assets and liabilities
shown which reprice or mature during a particular period were based upon the
contractual terms of the asset or liability or certain assumptions concerning
the amortization and prepayment of such assets and liabilities. Regular savings
accounts, NOW accounts and money market accounts, which collectively totaled
$253 million at December 31, 1997, were assumed to be withdrawn at annual
percentage rates of 17%, 37% and 79%, respectively. The collateralized mortgage
obligations were assumed to prepay at the same rate used for the mortgage-backed
securities collateralizing these obligations. Management believes that these
assumptions approximate actual experience and considers them reasonable,
although the actual amortization and repayment of assets and liabilities may
vary substantially.
<TABLE>
<CAPTION>
At December 31, 1997
More Than More Than
1 Year 1 Year 3 Years More Than
(Dollars in thousands) Or Less To 3 Years To 5 Years 5 Years Total
- --------------------------------------------------------------------------------------------------------------
<S> <C><C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Mortgage loans (1) $ 364,424 277,566 86,198 103,909 832,097
Home equity lines of credit (1) 81,417 - - - 81,417
Consumer loans and leases (1) 10,003 23,761 9,490 3,502 46,756
Mortgage-backed securities (2) 102,190 35,649 23,861 50,667 212,367
Interest-bearing deposits 33,784 - - - 33,784
Investment securities (2) 80,748 15,931 2,070 4,689 103,438
- --------------------------------------------------------------------------------------------------------------
Total interest-earning assets 672,566 352,907 121,619 162,767 1,309,859
INTEREST-BEARING LIABILITIES:
Regular savings accounts 21,693 32,949 21,480 51,482 127,604
NOW interest-bearing accounts 18,558 16,988 4,546 10,066 50,158
Money market accounts 59,341 8,264 3,934 3,576 75,115
Certificate accounts 549,803 153,745 24,822 208 728,578
Borrowed funds 160,231 13,300 - - 173,531
Collateralized mortgage obligations 1,065 - - - 1,065
- --------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 810,691 225,246 54,782 65,332 1,156,051
- --------------------------------------------------------------------------------------------------------------
Interest sensitivity gap $ (138,125) 127,661 66,837 97,435 153,808
- --------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap $ (138,125) (10,464) 56,373 153,808
- --------------------------------------------------------------------------------------------------------------
Cumulative interest sensitivity gap as a
percentage of total assets (10.22)% (0.77) 4.17 11.38
Cumulative net interest-earning assets as a
percentage of interest-bearing liabilities 82.96 % 98.99 105.17 113.30
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For purposes of the gap analysis, mortgage loans, home equity lines of
credit and consumer loans and leases are not reduced by the allowance for
loan losses and are reduced for non-performing loans.
(2) Mortgage-backed and investment securities do not reflect unrealized gains
(losses) resulting from the adoption of FASB No. 115. (See accompanying
notes to consolidated financial statements.)
Certain shortcomings are inherent in the method of analysis presented in the
foregoing table. For example, although certain assets and liabilities may have
similar maturities or periods to repricing, they may react in different degrees
to changes in market interest rates. Also, the interest rates on certain types
of assets and liabilities may fluctuate in advance of changes in market interest
rates, while interest rates on other types may lag behind changes in market
rates. Additionally, certain assets, such as ARM loans, have features which
restrict changes in interest rates on a short-term basis and over the life of
the asset. Further, in the event of a change in interest rates, prepayment and
early withdrawal levels would likely deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service their
debt may decrease in the event of an interest rate increase.
14
<PAGE>
LIQUIDITY
The Company's primary sources of funds are deposits, borrowings, proceeds
from principal and interest payments on loans and mortgage-backed securities and
the sale of securitized loans. While maturities and scheduled amortization of
loans and mortgage-backed securities are a predictable source of funds, deposit
flows and mortgage prepayments are greatly influenced by interest rate cycles
and economic conditions.
The Bank is required by regulation to maintain specific minimum levels of
liquid investments. Regulations currently in effect require the Bank to maintain
liquid assets at least equal to 4.0% of the sum of its average daily balance of
net withdrawable accounts and short-term borrowed funds. This regulatory
requirement may be changed from time to time by the OTS to reflect current
economic conditions and deposit flows. The Bank's liquidity ratios were 6.8% and
5.6% at December 31, 1997 and September 30, 1996, respectively.
The Company's most liquid assets are cash and cash equivalents, which
include investments in highly liquid, short-term investments and interest-
bearing deposits. The levels of these assets are dependent on the Company's
operating, financing, lending, and investing activities during any given period.
At December 31, 1997 and September 30, 1996, cash and cash equivalents totaled
$44.6 million and $29.0 million, respectively.
Liquidity management for the Company is both a daily and long-term function
of the Company's management strategy. Excess funds are generally invested in
short-term investments such as federal funds and interest-bearing deposits. In
the event that the Company should require funds beyond its ability to generate
them internally, additional sources of funds are available through the use of
FHLB advances.
The Company's cash flows are comprised of three classifications: cash flows
from operating activities, cash flows from investing activities, and cash flows
from financing activities.
Net cash related to operating activities, consisting primarily of interest
and dividends received less interest paid on deposits, and the origination and
sale of loans, utilized $3.2 million for the year ended December 31, 1997 and
provided $15.5 million for the year ended September 30, 1996.
Net cash related to investing activities, consisting primarily of principal
collections on loans and mortgage-backed securities and proceeds from the sale
or maturity of loans, mortgage-backed securities, and investment securities,
offset by disbursements for loans originated for investment, purchases of loans,
mortgage-backed securities and investment securities, provided $20.9 million and
$13.8 million for the years ended December 31, 1997 and September 30, 1996,
respectively.
Net cash related to financing activities, consisting primarily of net
activity in deposit and escrow accounts, proceeds from FHLB advances, and the
repayment of collateralized mortgage obligations, utilized $338,000 and $56.6
million for the years ended December 31, 1997 and September 30, 1996,
respectively.
At December 31, 1997, the Company had outstanding commitments to originate
and purchase $57.0 million loans. The Company anticipates that it will have
sufficient funds available to meet its current loan commitments. Certificates of
deposit which are scheduled to mature in one year or less from December 31,
1997, totaled $549.8 million. Management believes that a significant portion of
such deposits will remain with the Company.
CAPITAL COMPLIANCE
The Bank's tangible capital ratio at December 31, 1997, is 8.4%. This
exceeds the tangible capital requirement of 1.5% of adjusted assets by $93.4
million. The Bank's leverage capital ratio at December 31, 1997, is 8.5%. This
exceeds the leverage capital requirement of 3.0% of adjusted assets by $74.6
million. The Bank's risk-based capital ratio is 16.5% at December 31, 1997. The
Bank currently exceeds the risk-based capital requirement of 8.0% of risk-
weighted assets by $61.5 million.
15
<PAGE>
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and the accompanying Notes therein
have been prepared in accordance with generally accepted accounting principles
("GAAP"), which require the measurement of financial position and operating
results in terms of historical dollars without considering the changes in the
relative purchasing power of money over time due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
most industrial companies, nearly all the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
YEAR 2000
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without fully
considering the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by or at the
year 2000. The year 2000 issue affects virtually all companies and
organizations. The Company has outlined through its year 2000 plan, the
necessary steps to be undertaken to insure continued support and compliance of
the systems used by the Company relating to its operations, relationships with
customers, suppliers and others.
The Company uses an outside data processing servicer for most of its
computer applications, Fiserv, Milwaukee ("Fiserv"). The Company's management
maintains ongoing communications with Fiserv to evaluate progress on year 2000
programming. Fiserv has an extensive plan for the year 2000 and is on schedule
to complete the necessary modifications by June 30, 1998. Testing of programs
are scheduled to begin in the fall of 1998.
Other applications, not supported by Fiserv, such as the telecommunication
lines and equipment, software packages purchased to supplement operations,
computer hardware, security systems, etc., have been reviewed for compliance.
The Company estimates expending $515,000 in the near future to upgrade
telecommunications and computer equipment to become year 2000 compliant.
Depending upon the nature of the expenditure, the Company will follow its
accounting practices for capitalization. Certain of the Company's business
relationships such as leasing companies and commercial businesses, which the
Company has lending relationships, have been solicited for their year 2000
compliance issues.
The foregoing does not constitute a comprehensive summary of all the
Company's plans for the year 2000. It is intended only as a summary of some of
the plans for which the Company has outlined in its year 2000 plan.
LENDING ACTIVITIES
GENERAL
The Company's loan portfolio, which totaled $958 million at December 31,
1997, consists primarily of first mortgage loans secured by one-to four-family
residences. At December 31, 1997, 70% of total loans receivable consisted of
one-to four-family residential loans, of which 75% were adjustable-rate mortgage
loans ("ARMs"). The remaining loans consisted of multi-family residential loans
($74 million), commercial real estate loans ($54 million), construction and land
loans ($33 million), commercial leases ($36 million), home equity lines of
credit ($81 million), commercial business loans ($4 million), and consumer loans
($8 million), consisting of home equity loans, student loans, personal loans and
automobile loans.
All mortgage loans are reviewed by the Board of Directors, and all loans in
excess of $1,000,000 are individually reviewed by the Board of Directors prior
to issuance of a commitment. All loans between $300,000 and $1,000,000 require
review and approval by the Senior Management Credit Review Committee.
ONE-TO FOUR-FAMILY MORTGAGE LOANS
The Bank offers a variety of first mortgage loans secured by one-to four-
family, primarily owner-occupied, residences, including townhouse and
condominium units, located within the Bank's lending area. Fixed-rate
16
<PAGE>
conforming mortgage loans are originated or purchased by the Bank to be held in
the portfolio or securitized through FNMA and sold into the secondary market.
The Bank originates or purchases one-to four-family residential mortgage loans
in amounts up to 97% of the appraised value of the secured property. In cases
where the loan to value ratio exceeds 80%, the Bank requires private mortgage
insurance on the loan. Adjustable-rate mortgage loans are originated or
purchased for the Bank's own portfolio. The Bank generally follows Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") underwriting guidelines for all one-to four-family
residential mortgage loans. The Bank's primary source of loan originations is
through Preferred. Preferred operates out of six locations in the Chicago area
as well as through the Bank's retail offices. Preferred's loan origination
staff are commission based employees. They obtain loan referrals from realtors,
builders, past customers, as well as through mass media marketing. The Bank
will only purchase residential first mortgage loans that meet the Bank's
underwriting standards, which generally follow FNMA and FHLMC guidelines. For
the year ended December 31, 1997, one-to four-family mortgage loan originations
and purchases totaled $582 million.
The interest rates at which the Bank offers to grant a mortgage are
determined by the secondary market pricing for comparable mortgage-backed
securities, local mortgage competition, and the Bank's yield requirements. Upon
receipt of a completed loan application from a prospective borrower for a loan
secured by one-to four-family residential real estate, a credit report is
ordered, income and certain other information is verified and, if necessary,
additional financial information is requested. A current appraisal of the real
estate intended to secure the proposed loan is required. It is the Bank's policy
to obtain title insurance on all real estate first mortgage loans. Borrowers
must also provide a hazard insurance policy at or before closing. Generally, the
borrower's monthly mortgage payment will include, in addition to the normal
principal and interest payment, escrow funds for the payment of real estate
taxes and if required, private mortgage insurance and/or flood insurance. Most
mortgage loans originated include due-on-sale clauses, which provide the Bank
with the contractual right to deem the loan immediately due and payable in the
event that the borrower transfers ownership of the property without the Bank's
consent. It is the Bank's policy to enforce due-on-sale provisions.
In addition to 15 and 30 year fixed-rate mortgage loans which qualify for
sale to FNMA or FHLMC, the Bank offers a 7/23 balloon mortgage which also
qualifies for sale to FNMA. This loan carries a fixed rate for 7 years and a
provision allowing for a conversion to a 23 year fixed-rate loan at the end of
the initial 7 year term at the then current interest rate.
As previously stated, most ARM loans originated or purchased by the Bank are
underwritten according to FNMA standards and held in portfolio. The ARM loans
offered include loans that have a first payment adjustment after one, three, or
five years. The ARM interest rates offered are determined by secondary market
pricing, competitive conditions and the Bank's yield requirements. One year
ARMs are underwritten based on the initial rate, as well as the fully indexed
rate after the first adjustment period in order to minimize default risk.
Generally, the one year ARMs have an annual interest rate cap of 2% and a
maximum increase of 6% over the life of the loan. These adjustments are based
on the one year Treasury index. The three and five year ARMs are underwritten
based upon the initial rate which approximates a fully indexed rate. The three
and five year ARMs carry a fixed rate for the first three or five years and
adjusts annually thereafter in the same manner as the one year ARM. The Bank
also offers a three/three ARM which adjusts every three years based upon the
three year Treasury index and has a 2% maximum rate adjustment and a 6% maximum
rate increase over the life of the loan. As compared to fixed-rate loans, ARM
loans generally pose different risks. In a rising interest rate environment,
the underlying loan payment rises, which increases the potential for default by
the borrower. At the same time, the marketability of the underlying property
may be adversely affected by higher interest rates. In a decreasing rate
environment, mortgagors tend to refinance into fixed-rate loans.
MORTGAGE BANKING PROGRAM
The mortgage banking activities of the Bank are performed in conjunction
with the origination and purchase of conforming fixed-rate mortgage loans which
are securitized through FNMA for sale into the secondary market, generally with
servicing retained. The servicing fee income is generally .25% of the total loan
balances serviced.
The Bank's interest rate risk management policy specifies the use of certain
hedging activities in an attempt to reduce exposure to changes in loan market
prices from the time of commitment until securitization. The Bank
17
<PAGE>
engages in hedging transactions as a method of reducing its exposure to interest
rate risk present in the secondary market. The Bank's hedging transactions are
generally forward commitments to sell fixed-rate mortgage-backed securities at a
specified price and at a specified future date. The loans securitized through
FNMA are generally used to satisfy these forward commitments. The sale of fixed-
rate mortgage-backed securities for future delivery presents a risk to the Bank
that, if the Bank is not able to deliver the mortgage-backed securities on the
specified delivery date, it may be required to repurchase the forward commitment
to sell at the then current market price.
The mortgage banking activities of Preferred consist of originating mortgage
loans for correspondent lenders. Preferred presents loan applications to these
lenders to be underwritten and accepted by issuing a funding commitment. The
loans are closed in the name of Preferred, utilizing warehouse loans to provide
funding. Upon payment by the correspondent lenders for the funded loan and a
servicing fee, the loan is transferred and the warehouse loan is repaid.
MULTI-FAMILY AND COMMERCIAL REAL ESTATE LENDING
At December 31, 1997, multi-family loans represent 8% of total loans
receivable. Multi-family residential mortgage loans are offered under the
Bank's ARM or balloon programs with initial rate periods of one, three and five
years. Multi-family owner-occupied residential mortgage loans are made for
terms to maturity of up to 30 years, carry a loan-to-value ratio of
approximately 80% and require a positive net operating income to debt service
ratio. Loans secured by multi-family properties are qualified on the basis of
rental income generated by the property. Commercial real estate loans include
loans secured by retail stores, office buildings, office/warehouse, mixed use
properties, and other non-residential properties. At December 31, 1997,
commercial real estate loans represent 6% of total loans receivable. Commercial
real estate and non owner-occupied multi-family residential loans are
underwritten based on cash flows on both a current and an as-projected basis
and, in general, require a positive debt ratio coverage of 1.00 to 1.15. In
most instances, the Bank obtains a guarantee from the borrower/developer. The
management skills of the borrower are analyzed as part of the underwriting
review process.
Multi-family and commercial real estate loans entail some additional risk as
compared with one-to four-family residential mortgage lending, as they typically
involve large loan balances concentrated with single borrowers or groups of
related borrowers. In addition, the payment experience on loans secured by
income producing properties is typically dependent on the successful operation
of the related real estate project and thus may be subject to a greater extent
to adverse conditions in the real estate market or in the economy generally.
CONSTRUCTION LENDING
At December 31, 1997, construction loans represent 3% of total loans
receivable. The Bank has a residential construction loan program which combines
the construction loan and the mortgage loan in one closing. The Bank also
handles inspections for the customer and offers single or multiple payout
options. At December 31, 1997, residential construction loans represent 19% of
total construction loans. The remainder of the construction loan portfolio at
December 31, 1997, represents construction loans for non-residential and multi-
family purposes. The Bank makes loans on unimproved vacant property and for the
purpose of land acquisition and development when the borrower is expected to
commence construction within 18 months. Multi-family construction loans
represent 53% of the construction portfolio at December 31, 1997. Non-
residential real estate and multi-family residential construction loans are
underwritten based on cash flows on an as-projected basis and, in general,
require a positive debt ratio coverage of 1.00 to 1.15. In most instances, the
Bank obtains a guarantee from the borrower/developer. The management skills of
the borrower is also analyzed as part of the underwriting review process.
Construction lending also may be viewed as involving a greater degree of
risk than other one-to four-family mortgage lending. The repayment of the
construction loan is, to a great degree, dependent upon the successful and
timely completion of the construction of the subject property. Construction
delays or the financial impairment of the builder may further impair the
borrower's ability to repay the loan.
18
<PAGE>
COMMERCIAL LEASES
The commercial leases in the Bank's portfolio are purchased from leasing
companies or as participations from other lending institutions. Commercial
leases generally involve terms of 20 to 60 months and finance data processing
equipment and other commercial equipment such as telecommunication systems,
hospital equipment, and manufacturing equipment. The Bank has no commercial
leases for rolling stock or airplanes. The lessees are located throughout the
United States and include primarily Fortune 1000 and other major companies in
good financial condition. The rates for commercial leases are at a premium over
U.S. Treasury securities with comparable terms. The commercial lease financings
are secured by the assignment of the underlying lease and ultimately the leased
asset. Commercial leases involve certain risks primarily attributable to
general economic conditions affecting the lease and the obsolescence of the
equipment being leased. Generally, the lessee is required to maintain the
equipment and carry casualty insurance covering the value of the equipment.
EQUITY LINES OF CREDIT AND CONSUMER LOANS
The Bank originates home equity loans secured by one-to four-family
residences in its primary market area. The Bank's underwriting procedures for
these loans include a review of the completed loan application, satisfactory
credit report and verification of stated income and other financial information.
An appraisal of the property securing the equity loan is required. Title
insurance is obtained on equity loans over $100,000. For equity loans that are
less than $100,000, the title is verified by a title search and a second lien
position is secured. The Bank currently originates two types of equity loans.
One is a home equity line of credit, which is originated for loan amounts
ranging from $2,500 to $300,000 not to exceed 90% of the property's current
appraised value less all existing liens. These loans carry a variable interest
rate which adjusts monthly based upon the prime rate, as published in the Wall
----
Street Journal. The loan term is seven years and the majority of these loans
- --------------
require interest only payments with the full outstanding principal balance due
at the maturity of the loan. The Bank also grants fixed-rate home equity loans
for loan amounts up to $200,000, not to exceed 90% of the current appraised
value of the related property less all existing liens. In cases were the loan to
value ratio exceeds 80%, the Bank requires private mortgage insurance on the
loan.
The Bank offers automobile financing to customers within its market areas.
Credit is offered to qualified borrowers for loan amounts up to 80% of the
market value of the automobile at competitive rates with terms ranging from 30
to 60 months, depending on the age of the car.
The Bank also offers other types of consumer loans, including overdraft
protection and student loans. Existing checking account customers at the Bank
can qualify for up to $2,400 overdraft protection. The Bank offers student
loans under the Illinois Guaranty Loan Program ("IGLP"). These loans are made
to students in amounts up to a maximum of $4,000 per year to undergraduates and
$7,500 per year to graduate students.
Short-term, fully collateralized loans are also extended to customers. These
loans generally have a variable interest rate tied to the prime rate, as
published in the Wall Street Journal, for 90 - 360 day terms and are secured
-------------------
by collateral including stocks, bonds, real estate, or deposit accounts at the
Bank.
The Bank has recently expanded its automobile lending to include indirect
dealer financing. A qualified staff of professionals experienced in automobile
dealer financing has been hired. At December 31, 1997, no loans have been
extended under this program.
ENVIRONMENTAL ISSUES
The Company encounters certain environmental risks in its lending
activities. Although environmental risks are usually associated with industrial
and commercial loans, risks may be substantial for residential lenders like the
Company if environmental contamination makes security property unsuitable for
use. This could also have an effect on nearby property values. In accordance
with FNMA and FHLMC guidelines, appraisals for single family residences on which
the Company lends include comment on environmental influences. The Company
attempts to control risk by selecting appraisers that have experience and have
been professionally trained to recognize environmental risks. Environmental
liability can usually be avoided if the lender does not exert any management
control over the property in question. As such, the Bank takes great care in
assessing all its legal and environmental risks in cases where foreclosure is
imminent and proceeds only under advice of counsel in all cases. No assurance
can be given, however, that the values of properties securing loans in the
Company's portfolio will not be adversely affected by unforeseen environmental
risks.
19
<PAGE>
The following table sets forth the composition of the Company's loan
portfolio in dollar amounts and in percentages at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
At December 31, ----------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------------------------------------------------------------------------------------------------
Percent Percent Percent Percent Percent
of of of of of
Amount Total Amount Total Amount Total Amount Total Amount Total
--------- -------- -------- -------- -------- -------- -------- -------- --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to four-family $ 683,638 70.19% 487,041 81.86 535,530 86.51 462,444 83.61 232,485 78.20
Multi-family 74,144 7.61 25,217 4.24 25,538 4.13 29,286 5.30 21,697 7.30
Commercial real
estate 54,424 5.59 19,461 3.27 16,193 2.62 18,808 3.40 19,377 6.51
Construction 30,274 3.11 7,418 1.25 6,870 1.11 13,484 2.44 8,177 2.75
Land 2,910 0.30 2,579 0.43 1,642 0.26 1,316 0.24 175 0.06
--------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage
loans 845,390 86.80 541,716 91.05 585,773 94.63 525,338 94.99 281,911 94.82
Other loans:
Commercial leases 35,502 3.64 - - - - - - - -
Home equity lines
of credit 81,024 8.32 48,223 8.11 21,441 3.46 15,642 2.82 10,677 3.59
Commercial business
loans 4,286 0.44 478 0.08 475 0.08 475 0.09 400 0.13
Consumer loans 7,835 0.80 4,542 0.76 11,335 1.83 11,612 2.10 4,316 1.46
--------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans
receivable 974,037 100.00% 594,959 100.00 619,024 100.00 553,067 100.00 297,304 100.00
------ ------ ------ ------ ------
Add (deduct):
Loans in process (14,048) (4,053) (4,266) (8,304) (8,404)
Premiums and
deferred loan
fees, net 3,303 2,228 2,202 2,269 29
Allowance for
loan losses (5,395) (2,412) (2,589) (2,748) (2,656)
--------- -------- -------- -------- --------
Loans receivable, net $ 957,897 590,722 614,371 544,284 286,273
--------- -------- -------- -------- --------
</TABLE>
20
<PAGE>
The following table sets forth the Company's loan originations and loan
purchases, sales and principal repayments for the periods indicated:
<TABLE>
<CAPTION>
Three
Year Months Year Ended
Ended Ended September 30,
Dec. 31, Dec. 31, ---------------------
1997 1996 1996 1995
---------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Total loans receivable:
At beginning of period $ 614,527 594,959 619,024 553,067
Mortgage loans originated:
One-to four-family 577,304 110,022 479,332 168,469
Multi-family 22,417 1,204 4,103 353
Commercial real estate 17,864 2,765 4,762 250
Construction 17,634 6,146 18,095 15,976
Land 3,272 221 1,355 545
---------------------------------------------
Total mortgage loans originated 638,491 120,358 507,647 185,593
Mortgage loans purchased:
One-to four-family 5,071 1,397 5,736 63,233
Multi-family 4,224 - - 423
Commercial real estate 553 - - -
Land - - - 280
---------------------------------------------
Total mortgage loans purchased 9,848 1,397 5,736 63,936
Other loans:
Commercial leases 22,385 - - -
Home equity lines of credit, net 17,029 7,469 26,782 5,799
Commercial business loans 3,811 - - -
Consumer loans 6,883 1,233 2,215 2,793
---------------------------------------------
Total loans originated
and purchased 698,447 130,457 542,380 258,121
Mortgage loans acquired, purchase
of business 497,317 - - 15,243
Transfer of mortgage loans to
foreclosed real estate (272) (187) (353) -
Principal repayments (232,937) (20,161) (90,429) (64,142)
Sales of loans (603,045) (90,541) (475,663) (143,265)
---------------------------------------------
At end of period $ 974,037 614,527 594,959 619,024
---------------------------------------------
</TABLE>
21
<PAGE>
LOAN MATURITY AND REPRICING
The following table shows the scheduled principal amortization of the
Company's mortgage loan portfolio at December 31, 1997. Loans that have
adjustable rates are amortized using the current interest rate. The table does
not include prepayments.
<TABLE>
<CAPTION>
At December 31, 1997
------------------------------------------------------------
One-to Total
Four- Multi- Commercial Land and Loans
Family Family Real Estate Construction Receivable
------- ------ ------------- ------------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Mortgage loans:
Amounts due:
Within one year $ 19,571 4,206 3,797 4,242 31,816
After one year:
One to five years 86,910 41,280 23,147 16,437 167,774
Over five years 532,064 28,658 27,480 12,505 600,707
---------- ------ ------ ------ ---------
Total due after one year 618,974 69,938 50,627 28,942 768,481
---------- ------ ------ ------ ---------
Total mortgage loans held
for investment $ 638,545 74,144 54,424 33,184 800,297
---------- ------ ------ ------
Mortgage loans held for sale 45,093
Home equity lines of credit 81,024
Commercial leases 35,502
Commercial business loans 4,286
Consumer loans 7,835
---------
Total loans receivable 974,037
Add (deduct):
Loans in process (14,048)
Premiums and deferred loan fees, net 3,303
Allowance for loan losses (5,395)
---------
Loans receivable, net $ 957,897
---------
</TABLE>
The following table sets forth, at December 31, 1997, the dollar amount of
mortgage loans due or repricing after December 31, 1998, and indicates whether
such loans have fixed interest rates or adjustable interest rates.
<TABLE>
<CAPTION>
Due or Repricing after December 31,
1998
--------------------------------------
Fixed Adjustable Total
------------ ------------- ---------
<S> <C> <C> <C> <C>
(In thousands)
One-to four-family $ 142,403 476,571 618,974
Multi-family 50,443 19,495 69,938
Commercial real estate 41,074 9,553 50,627
Construction and land 9,977 18,965 28,942
------------ --------- --------
Total mortgage loans $ 243,897 524,584 768,481
------------ --------- --------
</TABLE>
DELINQUENCIES AND CLASSIFIED ASSETS
DELINQUENT AND IMPAIRED LOANS
Delinquencies on all loans are reviewed monthly by the Board of Directors.
Procedures taken with respect to delinquent loans differ depending on whether
the loan is serviced by the Bank or serviced by others.
The Bank's collection procedures with respect to loans serviced by the Bank
include sending a past due notice to the borrower on the seventeenth day of
nonpayment, making telephone contact with the borrower, sending a second late
notice on the twenty-third day of nonpayment and a letter on the last day of the
month. A notice of
22
<PAGE>
intent to foreclose is sent on the forty-fifth day of delinquency. When the
borrower is contacted, the Bank attempts to obtain full payment of the amount
past due. However, the Bank generally will seek to reach agreement with the
borrower on a forbearance plan to avoid foreclosure.
With respect to loans serviced by others, of which the Bank had $32.0
million at December 31, 1997, the Bank obtains monthly reports from the loan
servicers. The Bank contacts the servicer with respect to any loan that becomes
delinquent 60 days or more to review collection efforts. The Bank reviews the
servicer's recommendation regarding foreclosure when a loan is between 60 and
90 days delinquent and instructs the servicer to proceed in accordance with the
Bank's instructions.
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 114 "Accounting by Creditors for Impairment of a Loan"
and SFAS No. 118 "Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures" effective October 1, 1995. These statements apply
to all loans that are identified for evaluation except for large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment. These loans include, but are not limited to, credit card,
residential mortgage and consumer installment loans. Substantially all of the
Company's lending is excluded from the provisions of SFAS No. 114 and SFAS No.
118. Of the remaining loans which are to be evaluated for impairment, management
has determined through an internal loan review process that there were no loans
at December 31, 1997 nor during the year ended December 31, 1997, which met the
definition of an impaired loan. A loan is considered impaired when it is
probable that a creditor will be unable to collect contractual principal and
interest due according to the contractual terms of the loan agreement.
It is the policy of the Bank to discontinue the accrual of interest on any
loan that is 90 days or more past due. The Bank historically has not incurred
any significant losses on one-to four-family residential mortgage loans and
typically has not incurred losses on the disposition of foreclosed one-to four-
family residential properties.
Set forth below is certain information regarding delinquent loans at
December 31, 1997, September 30, 1996 and 1995.
<TABLE>
<CAPTION>
At December 31, 1997 At September 30, 1996
----------------------------------------------- -----------------------------------------
60-89 Days 90 Days or More 60-89 Days 90 Days or More
----------------------- ------------------ ------------------ ------------------
Number Principal Number Principal Number Principal Number Principal
of Balance of Balance of Balance of Balance
Loans of Loans Loans of Loans Loans of Loans Loans of Loans
----------- --------- ------ --------- ------ --------- ------ ---------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
One-to four-family 20 $ 2,367 32 $ 2,905 9 $ 1,029 8 $ 932
Commercial leases 4 99 - - - - - -
Commercial loans - - 4 8 - - - -
Consumer loans 1 9 4 109 1 1 - -
----- --------- ----- --------- ----- --------- ----- ---------
Total loans 25 $ 2,475 40 $ 3,022 10 $ 1,030 8 $ 932
===== ========= ===== ========= ===== ========= ===== =========
Delinquent loans to total loans 0.26% 0.31% 0.17% 0.16%
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1995
---------------------------------------------------------
60-89 Days 90 Days or More
--------------------------- --------------------
Number Principal Number Principal
of Balance of Balance
Loans of Loans Loans of Loans
---------- -------------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
One-to four-family 15 $ 1,765 9 $ 1,237
Home equity lines of credit 1 41 - -
Consumer loans 17 42 22 63
------ -------------- ------ -----------
Total loans 33 $ 1,848 31 $ 1,300
====== ============== ====== ===========
Delinquent loans to total loans 0.30% 0.21%
============== ===========
</TABLE>
23
<PAGE>
The following table sets forth information as to non-accrual loans as well as
to other non-performing assets, at the dates indicated. The Bank discontinues
the accrual of interest on loans ninety days or more past due, at which time all
accrued but uncollected interest is reversed.
<TABLE>
<CAPTION>
At At September 30,
Dec. 31, ---------------------------------
1997 1996 1995 1994 1993
---------- ------- ------ -------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-accrual mortgage loans
90 days or more past due $ 2,905 932 1,237 933 869
Non-accrual commercial loans
90 days or more past due 8 - - - -
Non-accrual consumer loans
90 days or more past due 109 - 63 66 90
---------- ------- ------ -------- ------
Total non-performing loans 3,022 932 1,300 999 959
Total foreclosed real estate 634 207 - (1) 4,447 4,629
---------- ------- ------ -------- ------
Total non-performing assets $ 3,656 1,139 1,300 5,446 5,588
========== ======= ====== ======== ======
Total non-performing loans to
total loans 0.31% 0.16 0.21 0.18 0.32
========== ======= ====== ======== ======
Total non-performing assets to
total assets 0.27% 0.17 0.18 0.85 1.04
========== ======= ====== ======== ======
</TABLE>
(1) The reduction in foreclosed real estate relates to the sale of a shopping
center in Orland Park, Illinois which was acquired by the Bank in
settlement of a non-performing loan on January 5, 1992.
For the years ended December 31, 1997, September 30, 1996 and 1995, the
interest that would have been included in income if the non-performing loans had
been current in accordance with their terms, is $169,511, $60,646 and $68,065,
respectively. During this same period, interest recorded on non-performing
loans totaled $112,590, $27,925 and $26,109, respectively.
CLASSIFIED ASSETS
Federal regulations provide for the classification of loans and other assets,
such as debt and equity securities, considered by the OTS to be of lesser
quality as "substandard," "doubtful" or "loss" assets. An asset is considered
"substandard" if it is inadequately protected by the paying capacity and net
worth of the obligor or the collateral pledged, if any. "Substandard" assets
include those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not corrected.
Assets classified as "doubtful" have all of the weaknesses inherent in those
classified "substandard," with the added characteristic that the weaknesses
present make "collection or liquidation in full," "highly questionable and
improbable," on the basis of currently existing facts, conditions and values.
Assets classified as "loss" are those considered "uncollectible" and of such
little value that their continuance as assets without the establishment of a
specific loss reserve is not warranted. Assets which do not currently expose
the insured institution to a sufficient degree of risk to warrant classification
in one of the aforementioned categories but possess credit deficiencies or
potential weaknesses are required to be designated "special mention" by
management.
When an insured institution classifies problem assets as either substandard or
doubtful, it is required to establish general allowances for losses in an amount
deemed prudent by management. General allowances represent loss allowances
which have been established to recognize the inherent risk associated with
lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the asset so classified or
to charge-off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS, which can require the establishment of additional
general or specific loss allowances. The Bank regularly reviews the assets in
its portfolio to determine whether any assets require classification in
accordance with applicable regulations.
24
<PAGE>
As of December 31, 1997, the Bank had total classified assets of $759,000, of
which $634,000 were classified "substandard," and $125,000 were classified as
"doubtful". The assets so classified consisted of single family residential
loans and foreclosed single family residential loans (real estate owned).
ALLOWANCE FOR LOAN LOSSES
Management employs a systematic methodology to conduct its periodic evaluation
of the adequacy of the allowance based upon the Bank's past loss loan
experience, known and inherent risks in the portfolio, adverse situations that
may affect the borrower's ability to repay, estimated value of any underlying
collateral and current and prospective economic conditions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for losses on loans receivable.
The following table sets forth certain information regarding the Company's
allowance for loan losses at the dates indicated.
<TABLE>
<CAPTION>
For The
For The Three
Year Months
Ended Ended For The Year Ended September 30,
Dec. 31, Dec. 31, ------------------------------------
1997 1996 1996 1995 1994 1993
-----------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period $ 2,272 2,412 2,589 2,748 2,656 2,376
Balance acquired in merger 3,203 - - - - -
Provision for loan losses - - 50 185 125 300
Charge-offs:
Mortgage loans:
One-to four-family (52) - - - - -
Commercial real estate - (150) (71) (77) - (20)
Commercial loans - - - (50) - -
Consumer loans:
Credit cards - - (166) (229) (33) -
Auto loans (10) - (9) - - -
Other (36) - - - - -
Recoveries:
Mortgage loans:
One-to four-family - 2 - - - -
Consumer loans:
Credit cards 10 8 17 12 - -
Auto loans 8 - 2 - - -
-----------------------------------------------------------
Balance at end of period $ 5,395 2,272 2,412 2,589 2,748 2,656
===========================================================
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Ratio of charge-offs during the period
to average loans outstanding
during the period 0.01% 0.03 0.04 0.06 0.01 0.01
Ratio of allowance for loan losses to net
loans receivable at end of period 0.56% 0.37 0.41 0.42 0.51 0.93
Ratio of allowance for loan losses
to non-performing loans
at end of period 178.52% 195.36 258.80 199.15 275.08 276.96
</TABLE>
25
<PAGE>
The following table sets forth the breakdown of the allowance for loan losses by
loan category at the dates indicated.
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1996 September 30, 1995
--------------------- ------------------- -------------------
% of Loans % of Loans % of Loans
in Category in Category in Category
to Total to Total to Total
Outstanding Outstanding Outstanding
Amount Loans Amount Loans Amount Loans
------- ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One-to four-family $ 1,983 70.19% $ 25 81.86% $ 25 86.51%
Multi-family 207 7.61 525 4.24 525 4.13
Commercial real estate 198 5.59 - - - -
Commercial leases 103 3.64 - - - -
Home equity lines of credit 207 8.32 - - - -
Consumer loans - - - - 213 1.83
Unallocated 2,697 - 1,862 - 1,826 -
------- ----------- ------ ----------- ------ -----------
Total allowance for loan losses $ 5,395 100.00% $2,412 100.00% $2,589 100.00%
======= =========== ====== =========== ====== ===========
</TABLE>
<TABLE>
<CAPTION>
September 30, 1994 September 30, 1993
--------------------- ---------------------
% of Loans % of Loans
in Category in Category
to Total to Total
Outstanding Outstanding
Amount Loans Amount Loans
-------- ----------- -------- -----------
<S> <C><C> <C> <C><C> <C>
(Dollars in thousands)
Mortgage loans:
One-to four-family $ 25 83.61% $ 25 78.20%
Multi-family 525 5.30 525 7.30
Consumer loans 268 2.10 - -
Unallocated 1,930 - 2,106 -
-------- ----------- -------- -----------
Total allowance for loan losses $ 2,748 100.00% $ 2,656 100.00%
======== =========== ======== ===========
</TABLE>
26
<PAGE>
INVESTMENT ACTIVITIES
The investment policy of the Company, as established by the Board of Directors
and implemented by the asset/liability committee, is designed primarily to
provide and maintain liquidity, to generate a favorable return on investments
without incurring undue interest rate and credit risk, and to compliment the
Company's lending activities. Federally chartered savings institutions such as
the Bank have the authority to invest in various types of liquid assets
including United States Treasury obligations, securities of various federal
agencies, certain certificates of deposit of insured banks and savings
institutions, certain bankers' acceptances, repurchase agreements and loans on
federal funds. Subject to various restrictions, federally chartered savings
institutions may also invest a proportion of their assets in commercial paper,
corporate debt securities and asset-backed securities. The Company's current
policy does not allow the institution to engage in interest rate swaps or to
invest in non-investment grade bonds or high-risk mortgage derivatives. The
Company's investment policy does, however, allow for the use of mortgage-backed
security short sales in hedging the amount of loans in the Bank's mortgage
pipeline. These short sales, in effect, are forward commitments to sell
mortgage-backed securities similar to those the Bank will deliver into the
secondary market upon securitization of the loans it originates or purchases.
At December 31, 1997, the Bank had $1.0 million in commitments to sell FNMA
mortgage-backed securities.
The following table sets forth certain information regarding the fair values
of the Company's investment portfolios at the dates indicated:
<TABLE>
<CAPTION>
At December At September 30,
31, ----------------
1997 1996 1995
--------- ------- -------
Fair Fair Fair
(In thousands) Value Value Value
- ------------------------------------------------- --------- ------- -------
<S> <C> <C> <C>
Interest-bearing deposits:
FHLB daily investment $ 33,784 22,924 50,845
--------- ------- -------
Investment securities:
United States government and agency obligations $ 89,768 1,998 1,998
Other investment securities 1,707 - -
--------- ------- -------
Total investment securities $ 91,475 1,998 1,998
========= ======= =======
Mortgage-backed securities:
Federal Home Loan Mortgage Corporation $ 33,593 460 782
Government National Mortgage Association 91,676 - -
Federal National Mortgage Association 56,551 4,907 6,365
Collateralized mortgage obligations 32,137 - -
--------- ------- -------
Total mortgage-backed securities $ 213,957 5,367 7,147
========= ======= =======
</TABLE>
27
<PAGE>
The table below sets forth certain information regarding the maturities of the
Company's investment portfolios at December 31, 1997.
<TABLE>
<CAPTION>
Investment Securities: At December 31, 1997
- ----------------------------- ----------------------
Weighted
Fair Average
Maturity Period Value Yield
- ----------------------------- ---------- ---------
<S> <C> <C>
(Dollars in thousands)
Less than one year $ 4,484 5.62%
One to three years 7,994 6.57
Three to five years 10,342 6.56
Five to ten years 10,471 7.41
More than ten years 58,184 8.01
----------
Total investment securities $ 91,475 7.53
----------
Weighted average
remaining years to maturity 12
----------
</TABLE>
<TABLE>
<CAPTION>
Mortgage-Backed Securities: At December 31, 1997
- ---------------------------------- ----------------------
Weighted
Fair Average
Maturity Period Value Yield
- ---------------------------------- ----------------------
<S> <C> <C>
(Dollars in thousands)
One to three years $ 820 7.07%
Three to five years 1,106 7.35
Five to ten years 3,066 8.07
More than ten years 208,965 7.23
-----------
Total mortgage-backed securities $ 213,957 7.24
-----------
Weighted average
remaining years to maturity 27
-----------
</TABLE>
28
<PAGE>
SOURCES OF FUNDS
GENERAL
Deposits, loan and mortgage-backed security repayments, sales of loans and
FHLB advances are the primary source of the Company's funds for use in lending,
investing and for other general purposes.
DEPOSITS
The Bank offers a variety of deposit accounts having a range of interest rates
and terms. The Bank's deposits principally consist of fixed-term certificates,
regular savings, money market, individual retirement accounts, and NOW
(checking) accounts. In addition, the Bank offers commercial checking accounts.
The flow of deposits is influenced significantly by general economic conditions,
the Bank's pricing policies, changes in money market and prevailing interest
rates, and competition. The Bank's deposits are typically obtained from the area
in which its offices are located. The Bank relies primarily on customer service
and long standing relationships with customers to attract and retain these
deposits. The Bank has never used brokered deposits. Certificate accounts in
excess of $100,000 are not actively solicited by the Bank, however, when such
deposits are made to the Bank, a market rate of interest is paid.
The Bank seeks to attract and retain stable core deposits through the services
it offers customers, such as by providing extended hours, both early and late,
at its offices and walk-up/drive-up facilities. In addition, customers can
access their accounts through an ATM network throughout the metropolitan Chicago
area and on a nationwide basis, and through a 24-hour telephone banking system.
When pricing deposits, consideration is given to local competition, market
conditions and the need for funds. Management's strategy has been to price its
deposit rates at the median of the rates paid for deposits in its respective
markets.
The following table presents the deposit activity of the Bank for the periods
indicated:
<TABLE>
<CAPTION>
Three Months Year Ended
Year Ended Ended September 30,
December 31, December 31, ------------------------
(In thousands) 1997 1996 1996 1995
- ------------------------------------ -------------------------------------------------------
<S> <C> <C> <C> <C>
Deposits $ 2,438,183 478,174 1,966,050 1,593,336
Deposits acquired,
including acquisition premium 515,640 - - -
Withdrawals (2,429,286) (472,188) (1,976,850) (1,583,172)
-------------------------------------------------------
Net deposits (withdrawals) 524,537 5,986 (10,800) 10,164
Interest credited on deposits 35,208 4,411 17,767 15,905
-------------------------------------------------------
Total increase in deposits $ 559,745 10,397 6,967 26,069
-------------------------------------------------------
</TABLE>
At December 31, 1997, the Bank had outstanding $127.3 million in certificate
accounts in amounts of $100,000 or more maturing as follows:
<TABLE>
<CAPTION>
Maturity Period Amount
- ----------------------- ---------------
(In thousands)
<S> <C>
Three months or less $ 31,360
Over three through six months 21,122
Over six through twelve months 43,425
Over twelve months 31,414
---------------
Total $ 127,321
---------------
</TABLE>
29
<PAGE>
The following table sets forth the distribution of the Bank's average deposit
accounts and the average interest rates paid on each category of deposits
presented for the years indicated:
<TABLE>
<CAPTION>
For The Year Ended December 31, For The Year Ended September 30,
------------------------------- --------------------------------------------------------
1997 1996 1995
------------------------------- --------------------------- ---------------------------
Average Average Average
Percent Interest Percent Interest Percent Interest
Average of Total Rate Average of Total Rate Average of Total Rate
Balance Deposits Paid Balance Deposits Paid Balance Deposits Paid
--------- --------- -------- -------- -------- ------- -------- -------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand accounts:
NOW noninterest-bearing $ 41,718 4.35% - % 35,311 7.72 - 31,423 7.25 -
NOW interest-bearing 48,960 5.10 1.60 22,861 5.00 1.59 22,875 5.28 1.67
Regular savings 136,773 14.25 2.58 82,177 17.96 2.55 88,081 20.34 2.76
Money market 77,974 8.12 3.16 54,521 11.92 3.27 61,045 14.09 3.32
--------- --------- -------- -------- -------- --------
Total 305,425 31.82 2.22 194,870 42.60 2.18 203,424 46.96 2.38
--------- --------- -------- -------- -------- --------
Certificate accounts:
Three months plus 11,137 1.16 4.87 3,995 0.87 4.87 3,984 0.92 4.53
Six months plus 248,489 25.89 5.71 69,774 15.25 5.58 51,735 11.94 5.33
One year plus 111,641 11.63 5.56 64,350 14.07 5.99 54,543 12.60 5.42
Two year plus 70,445 7.34 6.09 11,488 2.51 5.40 15,329 3.54 4.49
Three year plus 3,290 0.34 5.51 3,431 0.75 5.02 3,962 0.91 4.84
Four year plus 10,413 1.08 5.93 1,422 0.31 5.24 1,463 0.34 5.32
Five year plus 111,852 11.65 6.10 63,578 13.90 6.38 57,573 13.29 6.40
Jumbo 44,880 4.68 5.91 19,661 4.30 5.89 12,793 2.95 5.84
Retirement and other 42,349 4.41 5.42 24,904 5.44 5.71 28,371 6.55 4.64
--------- --------- -------- -------- -------- --------
Total 654,496 68.18 5.78 262,603 57.40 5.88 229,753 53.04 5.48
--------- --------- -------- -------- -------- --------
Total deposits $ 959,921 100.00% 4.64% 457,473 100.00 4.30 433,177 100.00 4.02
--------- --------- -------- -------- -------- --------
</TABLE>
30
<PAGE>
The following table presents, by various rate categories, the amount of
certificate accounts outstanding at December 31, 1997, September 30, 1996 and
1995 and the periods to maturity of the certificate accounts outstanding at
December 31, 1997.
<TABLE>
<CAPTION>
At At Period to Maturity
December 31, September 30, from December 31, 1997
---------------------------------- -------------------------------------------
Within One to
1997 1996 1995 One Year Three Years Thereafter Total
---------------- ------- ------- --------- ----------- ---------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Certificate accounts:
3.00% to 3.99% $ - - 6,218 - - - -
4.00% to 4.99% 10 6,360 15,361 10 - - 10
5.00% to 5.99% 401,949 182,958 104,439 309,506 75,035 17,408 401,949
6.00% to 6.99% 304,463 56,607 100,578 239,878 57,171 7,414 304,463
7.00% to 7.99% 21,828 18,682 26,595 81 21,539 208 21,828
8.00% to 8.99% 18 94 171 18 - - 18
---------------- ------- ------- --------- ----------- ---------- -------
Total $ 728,268 264,701 253,362 549,493 153,745 25,030 728,268
---------------- ------- ------- --------- ----------- ---------- -------
</TABLE>
BORROWINGS AND COLLATERALIZED MORTGAGE OBLIGATIONS
Although deposits are the Bank's primary source of funds, the Bank's policy
has been to utilize borrowings, such as advances from the FHLB-Chicago.
The Bank obtains advances from the FHLB-Chicago upon the security of its
capital stock in the FHLB-Chicago and certain of its mortgage loans. Such
advances are made pursuant to several different credit programs, each of which
has its own interest rate and range of maturities. The maximum amount that the
FHLB-Chicago will advance to member institutions, including the Bank, for
purposes other than meeting withdrawals, fluctuates from time to time in
accordance with the policies of the OTS and the FHLB-Chicago. The maximum
amount of FHLB-Chicago advances to a member institution generally is reduced by
borrowings from any other source. At December 31, 1997, the Bank's FHLB-Chicago
advances totaled $163.6 million.
The CMOs outstanding at December 31, 1997 were issued through a limited-
purpose finance subsidiary in 1985. The CMOs are securitized by mortgage-backed
securities that are pledged to an unaffiliated commercial bank as trustee. The
original issuance of CMOs aggregated $65.9 million and the Bank received cash of
$59.4 million. The outstanding aggregate balance of the CMOs at December 31,
1997 was $1.1 million and the book value of the mortgage-backed securities
collateralizing the CMOs was $3.9 million. The CMOs were originally issued in
two series, each originally having four tranches, the fourth being a zero coupon
tranche. At December 31, 1997 the first three tranches of both Series have
prepaid. The original maturity of the bond issue was structured over 26 years.
The estimated remaining life of the CMOs as of December 31, 1997 is less than
one year. The funds derived from issuance of the CMOs were used to repay FHLB
advances and to fund the Bank's lending activities in 1985 and 1986.
In connection with the initial public offering, the Bank established a
leveraged Employee Stock Ownership Plan ("ESOP"). The ESOP was funded by the
proceeds from a $1.2 million loan from an unaffiliated third party lender at a
rate of prime and one half of one percent, maturing June 30, 1999. The loan was
secured by shares of the Company purchased with the proceeds of the loan. In
connection with the merger, the ESOP plans maintained by Hinsdale Financial
Corporation and Liberty Bancorp, Inc. were terminated. A number of the
unallocated shares held by each ESOP were sold by each ESOP, in a manner which
complied with the Internal Revenue Code and ERISA, in order to provide
sufficient proceeds to repay the outstanding ESOP loans.
The Bank enters into sales of securities under agreement to repurchase the
identical securities ("reverse repurchase agreements") with nationally
recognized primary securities dealers. The reverse repurchase agreements are
treated as financings and the obligations to repurchase securities sold are
reflected as borrowed funds in the consolidated statements of financial
condition. The dollar amount of the securities underlying the agreements remain
in the asset accounts. Securities sold under agreements to repurchase consisted
of mortgage-backed securities reported as available for sale with an amortized
cost of $10.1 million and a fair value of $10.2 million at December 31, 1997.
The securities underlying the agreements were delivered to the dealers who
arranged the transactions.
31
<PAGE>
The following table sets forth certain information regarding borrowings and
collateralized mortgage obligations at or for the dates indicated:
<TABLE>
<CAPTION>
At or For The Year
At or For The Ended
Year Ended September 30,
December 31, ------------------
1997 1996 1995
-------------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
FHLB-Chicago advances:
Average balance outstanding $ 157,632 134,235 166,353
Maximum amount outstanding at any
month-end during the year $ 218,050 148,900 184,300
Balance outstanding at end of year $ 163,550 128,900 162,700
Weighted average interest rate during the year (1) 6.08% 6.42 6.02
Weighted average interest rate at end of year 6.00% 6.17 6.25
Collateralized mortgage obligations:
Average balance outstanding $ 1,528 3,224 4,881
Maximum amount outstanding at any
month-end during the year $ 1,990 3,962 5,558
Balance outstanding at end of year $ 1,065 2,542 4,353
Weighted average interest rate during the year (1) 12.24% 13.34 12.87
Weighted average interest rate at end of year 12.81% 12.80 13.16
Securities sold under agreements to repurchase:
Average balance outstanding $ 29,902 - -
Maximum amount outstanding at any
month-end during the year $ 52,854 - -
Balance outstanding at end of year $ 9,981 - -
Weighted average interest rate during the year (1) 5.95% - -
Weighted average interest rate at end of year 5.95% - -
Debt of Employee Stock Ownership Plan:
Average balance outstanding $ - 575 750
Maximum amount outstanding at any
month-end during the year $ - 643 814
Balance outstanding at end of year $ - - 686
Weighted average interest rate during the year (1) - % 9.11 9.30
Weighted average interest rate at end of year - % - 9.25
Warehouse lines of credit:
Average balance outstanding $ - 1,930 4,418
Maximum amount outstanding at any
month-end during the year $ - 15,320 24,069
Balance outstanding at end of year $ - - 21,953
Weighted average interest rate during the year (1) - % 9.12 6.88
Weighted average interest rate at end of year - % - 8.54
- ------------------------------------------------------------------------------------------
</TABLE>
(1) Computed on the basis of daily balances.
32
<PAGE>
SUBSIDIARIES
The following is a description of the Company's subsidiaries.
Liberty Financial Services, Inc., a wholly-owned subsidiary of the Bank,
provides full service insurance services including life, health, accident,
automobile, property insurance and annuities. These insurance products are
offered to customers of the Bank and consumers in the Bank's respective markets.
Liberty Lincoln Service Corporation ("LLSC"), a wholly-owned subsidiary of
the Bank, was acquired through the merger. This subsidiary provided full
service insurance services and annuities and security brokerage services. The
operations of this subsidiary have been combined with that of Liberty Financial
Services, Inc. However, this subsidiary owns a 17.47% ownership interest as a
limited partner and a 0.18% ownership interest as a general partner in an
Illinois limited partnership formed in 1987 for the purpose of (i) developing in
the City of Evanston, Illinois, a public parking garage containing 602 parking
spaces and (ii) developing, managing and operating a 190-unit luxury rental
apartment building adjacent thereto. The parking garage was sold in 1989 to the
City of Evanston, Illinois. As a result of the purchase accounting entry
recorded due to the merger, the remaining investment in this partnership
recorded on the books of LLSC was written-off. This subsidiary will remain
active until the property is sold.
NASCOR II Corporation is a limited-purpose finance subsidiary of the Bank
that was established in 1985 through which the CMOs were issued. The CMOs are
secured by mortgage-backed securities pledged to an independent trustee. The
outstanding aggregate balance of the CMOs at December 31, 1997 was $1.1 million,
and the book value of the mortgage-backed securities collateralizing the CMOs
was $3.9 million. The funds derived from issuance of the CMOs were used to
repay FHLB advances and to fund the Bank's lending activities in 1985 and 1986.
Upon repayment of the CMO bonds, NASCOR II Corporation will have served its
limited-purpose as a finance subsidiary of the Bank.
Preferred Mortgage Associates, Ltd., a wholly-owned subsidiary of the Bank,
is one of the largest mortgage brokers in the Chicago metropolitan area.
Preferred has six mortgage origination offices including its headquarters in
Downers Grove, Illinois. Established in 1987, Preferred brokered loans for
approximately twenty-five separate lenders in 1997. Preferred will continue to
provide mortgage originations for lenders locally and nationwide. The Bank
anticipates that it will retain approximately 20% of Preferred's loan
origination volume.
Liberty Lincoln Service Corporation II ("LLSCII"), is a wholly-owned
subsidiary of the Company acquired through the merger. LLSCII was established
for the purpose of investing in participations in land acquisition and
development, and equity investments in real estate limited partnerships. The
existing investments of LLSCII consist of two development projects, one located
in East Dundee, Illinois and one in Joliet, Illinois.
The East Dundee project is for construction and sale of 213 single family
and townhouse units. The Joliet project is for the construction and sale of 80
single family homes. There has been no individual home site construction or
sales to date for the Joliet project. For the year ended December 31, 1997, a
combined loss of $380,000 was recorded.
PERSONNEL
As of December 31, 1997, the Company had 399 full-time employees and 121 part-
time employees. The employees are not represented by a collective bargaining
unit, and the Company considers its relationship with its employees to be
excellent.
33
<PAGE>
FORWARD LOOKING STATEMENTS
The preceding "Business," "Legal Proceedings" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" sections of this Form
10-K contain various "forward looking statements" within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which represents the Company's expectations
and beliefs concerning future events include, without limitation, the following:
the Company's efforts in retaining and expanding its customer base and
differentiating it from its competition; the FDIC insurance premium assessments
for 1998; the impact of interest rates on its net interest income as a result of
its balance sheet structure; the impact of its policy guidelines and strategies
on its net interest income based on future interest rate projections; the
ability to provide funding sources for both the Bank and the Company;
Management's assessment of its provision and reserve for loan loss levels based
upon future changes in the composition of its loan portfolio, loan losses,
collateral value and economic conditions.
The Company cautions that these statements are further qualified by important
factors that could cause actual results to differ materially from those set
forth in the forward looking statements due to market, economic and other
business related risks and uncertainties effecting the realization of such
statements. Certain of these risks and uncertainties included in such forward
looking statements include, without limitations, the following: dynamics of the
market served in terms of competition from traditional and nontraditional
financial service providers can effect both the funding capabilities of the
Company in terms of deposit gathering as well as asset generation capabilities;
future legislation to combine the BIF and the SAIF, as well as future financial
losses in the bank and savings and loan industries and actions by the Federal
Reserve Board may result in the imposition of costs and constraints on the
Company through higher FDIC insurance premiums, significant fluctuations in
market interest rates and operational limitations; deviations from the
assumptions used to evaluate the appropriate level of the reserve for loan
losses as well as future purchases and sales of loans may effect the appropriate
level of the reserve for loan losses and thereby effect the future levels of
provisioning.
Accordingly, results actually achieved may differ materially from expected
results in these statements. The Company does not undertake, and specifically
disclaims, any obligation to update any forward looking statements to reflect
events or circumstances occurring after the date of such statements.
REGULATION AND SUPERVISION
GENERAL
The Company, as a savings and loan holding company, is required to file
certain reports with, and otherwise comply with the rules and regulations of the
OTS under the Home Owners' Loan Act, as amended (the "HOLA"). In addition, the
activities of savings institutions, such as the Bank, are governed by the HOLA
and the Federal Deposit Insurance Act ("FDI Act"). The Bank is subject to
extensive regulation, examination and supervision by the OTS, as its primary
federal regulator, and the FDIC, as the deposit insurer. The Bank is a member
of the Federal Home Loan Bank ("FHLB") System and its deposit accounts are
insured up to applicable limits by the Savings Association Insurance Fund
("SAIF") managed by the FDIC. The Bank must file reports with the OTS and the
FDIC concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers
with, or acquisitions of, other savings institutions. The OTS and/or the FDIC
conduct periodic examinations to test the Bank's compliance with various
regulatory requirements. This regulation and supervision establishes a
comprehensive framework of activities in which an institution can engage and is
intended primarily for the protection of the insurance fund and depositors. The
regulatory structure also gives the regulatory authorities extensive discretion
in connection with their supervisory and enforcement activities and examination
policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any
change in such regulation, whether by the FDIC, OTS, or Congress, could have a
material adverse impact on the Company, the Bank and their operations. Certain
of the regulatory requirements applicable to the Bank and the Company are
referred to below or elsewhere herein. The description of statutory provisions
and regulations applicable to savings institutions and their holding companies
set forth in this Form 10-K does not purport to be a complete description of
such statutes and regulations and their effects on the Bank and the Company.
34
<PAGE>
HOLDING COMPANY REGULATION
The Company is a nondiversified unitary savings and loan holding company
within the meaning of the HOLA. As a unitary savings and loan holding company,
the Company generally will not be restricted under existing laws as to the types
of business activities in which it may engage, provided that the Bank continues
to be a qualified thrift lender ("QTL"). Upon any non-supervisory acquisition
by the Company of another savings institution or savings bank that meets the QTL
test and is deemed to be a savings institution by the OTS, the Company would
become a multiple savings and loan holding company (if the acquired institution
is held as a separate subsidiary) and would be subject to extensive limitations
on the types of business activities in which it could engage. The HOLA limits
the activities of a multiple savings and loan holding company and its non-
insured institution subsidiaries primarily to activities permissible for bank
holding companies under Section 4(c)(8) of the Bank Holding Company Act ("BHC
Act"), subject to the prior approval of the OTS, and activities authorized by
OTS regulation.
The HOLA prohibits a savings and loan holding company, directly or indirectly,
or through one or more subsidiaries, from acquiring more than 5% of the voting
stock of another savings institution or holding company thereof, without prior
written approval of the OTS; acquiring or retaining, with certain exceptions,
more than 5% of a nonsubsidiary company engaged in activities other than those
permitted by the HOLA; or acquiring or retaining control of a depository
institution that is not insured by the FDIC. In evaluating applications by
holding companies to acquire savings institutions, the OTS must consider the
financial and managerial resources and future prospects of the company and
institution involved, the effect of the acquisition on the risk to the insurance
funds, the convenience and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions. The
states vary in the extent to which they permit interstate savings and loan
holding company acquisitions.
Although savings and loan holding companies are not subject to specific
capital requirements or specific restrictions on the payment of dividends or
other capital distributions, HOLA does prescribe such restrictions on subsidiary
savings institutions, as described below. The Bank must notify the OTS 30 days
before declaring any dividend to the Company. In addition, the financial impact
of a holding company on its subsidiary institution is a matter that is evaluated
by the OTS and the agency has authority to order cessation of activities or
divestiture of subsidiaries deemed to pose a threat to the safety and soundness
of the institution.
FEDERAL SAVINGS INSTITUTION REGULATION
CAPITAL REQUIREMENTS
The OTS capital regulations require savings institutions to meet three minimum
capital standards: a 1.5% tangible capital ratio, a 3% leverage (core) capital
ratio and an 8% risk-based capital ratio. In addition, the prompt corrective
action standards discussed below also establish, in effect, a minimum 2%
tangible capital standard, a 4% leverage (core) capital ratio (3% for
institutions receiving the highest rating on the CAMEL financial institution
rating system), and, together with a risk-based capital standard itself, a 4%
Tier I risk-based capital standard. Core capital is defined as common
stockholders' equity (including retained earnings), certain noncumulative
perpetual preferred stock and related surplus, and minority interests in equity
accounts of consolidated subsidiaries less intangibles other than certain
purchased mortgage servicing rights and credit card relationships. The OTS
regulations also require that, in meeting the leverage ratio, tangible and risk-
based capital standards, institutions must generally deduct investments in and
loans to subsidiaries engaged in activities not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier I (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of 4% and 8%, respectively.
In determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, as
assigned by the OTS capital regulation based on the risks OTS believes are
inherent in the type of asset. The components of Tier I (core) capital are
equivalent to those discussed earlier. The components of supplementary capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory
35
<PAGE>
convertible securities, subordinated debt and intermediate preferred stock and
the allowance for loan and lease losses limited to a maximum of 1.25% of risk-
weighted assets. Overall, the amount of supplementary capital included as part
of total capital cannot exceed 100% of core capital.
The OTS regulatory capital requirements also incorporate an interest rate risk
component. Savings institutions with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings institution's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200 basis point increase or decrease in market interest rates
divided by the estimated economic value of the institution's assets. In
calculating its total capital under the risk-based capital rule, a savings
institution whose measured interest rate risk exposure exceeds 2% must deduct an
amount equal to one-half of the difference between the institution's measured
interest rate risk and 2%, multiplied by the estimated economic value of the
institution's assets. The Director of the OTS may waive or defer a savings
institution's interest rate risk component on a case-by-case basis. A savings
institution with assets of less than $300 million and risk-based capital ratios
in excess of 12% is not subject to the interest rate risk component, unless the
OTS determines otherwise. For the present time, the OTS has deferred
implementation of the interest rate risk component. If the Bank had been
subject to an interest rate risk capital component as of December 31, 1997, the
Bank's capital requirement would have increased by $5.6 million under the
formula for calculating an interest rate risk component as described above.
PROMPT CORRECTIVE ACTION REGULATION
Under the OTS prompt corrective action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of undercapitalization.
Generally, a savings institution is considered "well capitalized" if its ratio
of total capital to risk-weighted assets is at least 10%, its ratio of Tier I
(core) capital to risk-weighted assets is at least 6%, its ratio of core capital
to total assets is at least 5%, and it is not subject to any order or directive
by the OTS to meet a specific capital level. A savings institution generally is
considered "adequately capitalized" if its ratio of total capital to risk-
weighted assets is at least 8%, its ratio of Tier I (core) capital to risk-
weighted assets is at least 4%, and its ratio of core capital to total assets is
at least 4% (3% if the institution receives the highest camel rating). A
savings institution that has a ratio of total capital to risk-weighted assets of
less than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less
than 4% or a ratio of core capital to total assets of less than 4% (3% or less
for institutions with the highest examination rating) is considered to be
"undercapitalized." A savings institution that has a total risk-based capital
ratio less than 6%, a Tier I risk-based capital ratio of less than 3% or a
leverage ratio that is less than 3% is considered to be "significantly
undercapitalized" and a savings institution that has a tangible capital to
assets ratio equal to or less than 2% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date a savings
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." Compliance with the plan
must be guaranteed by the parent holding company. In addition, numerous
mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.
INSURANCE OF DEPOSIT ACCOUNTS
The FDIC has adopted a risk-based deposit insurance system that assesses
deposit insurance premiums according to the level of risk involved in an
institution's activities. An institution's risk category is based upon whether
the institution is classified as "well capitalized," "adequately capitalized" or
"undercapitalized" and one of three supervisory subcategories within each
capital group. The supervisory subgroup to which an institution is assigned is
based on a supervisory evaluation and information which the FDIC determines to
be relevant to the institution's financial condition and the risk posed to the
deposit insurance fund. Based on its capital and supervisory subgroups, each
SAIF member institution is assigned an annual FDIC assessment rate between 23
basis points for an institution in the highest category (i.e., well capitalized
and healthy) and 31 basis points for an institution in the lowest category
(i.e., undercapitalized and posing substantial supervisory concern). The FDIC
has authority to further raise premiums if deemed necessary. If such action is
taken, it could have an adverse effect on the earnings of the Bank.
36
<PAGE>
On September 30, 1996, the President signed into law the Deposit Insurance
Funds Act of 1996 (the "Funds Act") which, among other things, imposed a special
one-time assessment on SAIF member institutions, including the Bank, to
recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special
assessment of 65.7 basis points on SAIF assessable deposits held as of March 31,
1995, payable November 27, 1996. A special assessment of $2.8 million was
recognized by the Bank as an expense in September 1996. The special assessment
is tax deductible, which led to an after-tax charge of $1.8 million, or $0.41
per share.
The Funds Act also spreads the obligations for payment of the Financing
Corporation ("FICO") bonds across all SAIF and BIF members. Beginning on
January 1, 1997, BIF deposits were assessed for FICO payments at a rate of 20%
of the rate assessed on SAIF deposits. BIF deposits were assessed a FICO
payment of 1.3 basis points, while SAIF deposits were assessed 6.5 basis points.
Full pro rata sharing of the FICO payments between BIF and SAIF members will
occur on the earlier of January 1, 2000 or the date the BIF and SAIF are merged.
The Funds Act specifies that the BIF and SAIF will be merged on January 1, 1999,
provided no savings associations remain as of that time.
As a result of the Funds Act, the FDIC lowered SAIF assessments to 0 to 27
basis points, a range comparable to that of BIF members. However, SAIF members
will continue to make higher FICO payments described above. Management cannot
predict the level of FDIC insurance assessments on an on-going basis, whether
the savings association charter will be eliminated, or whether the BIF and SAIF
will eventually be merged.
Under the FDI Act, insurance of deposits may be terminated by the FDIC upon a
finding that the institution has engaged in unsafe or unsound practices, is an
unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition or violation that might
lead to termination of deposit insurance.
LOANS TO ONE BORROWER
Under HOLA, savings institutions are generally subject to the limits on loans
to one borrower applicable to national banks. Generally, savings institutions
may not make a loan or extend credit to a single or related group of borrowers
in excess of 15% of its unimpaired capital and surplus. An additional amount
may be lent, equal to 10% of unimpaired capital and surplus, if such loan is
secured by readily-marketable collateral, which is defined to include certain
financial instruments and bullion. At December 31, 1997, the Bank's limit on
loans to one borrower was $18.8 million. At December 31, 1997, the Bank's
largest aggregate outstanding balance of loans to any one borrower was $6.3
million.
QTL TEST
The HOLA requires savings institutions to meet a QTL test. Under the QTL
test, a savings and loan association is required to maintain at least 65% of its
"portfolio assets" (total assets less (i) specified liquid assets up to 20% of
total assets; (ii) intangibles, including goodwill; and (iii) the value of
property used to conduct business) in certain "qualified thrift investments"
(primarily residential mortgages and related investments, including certain
mortgage-backed securities) in at least 9 months out of each 12 month period.
A savings institution that fails the QTL test is subject to certain operating
restrictions and may be required to convert to a bank charter. As of December
31, 1997, the Bank maintained 90.8% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test.
LIMITATIONS ON CAPITAL DISTRIBUTIONS
OTS regulations impose limitations on all capital distributions by savings
institutions. Capital distributions include cash dividends, payments to
repurchase or otherwise acquire the savings association's shares, payments to
stockholders of another institution in a cash-out merger and other distributions
charged against capital. The rule establishes three tiers of institutions,
which are based primarily on an institution's capital level. An institution
that exceeds all fully phased-in capital requirements before and after a
proposed capital distribution ("Tier 1 Bank") and has not been advised by the
OTS that it is in need of more than normal supervision, could, after prior
notice but without obtaining approval of the OTS, make capital distributions
during a calendar year up to (i) 100% of its net earnings to date during the
calendar year plus the amount that would reduce by one-half its "surplus capital
ratio" (the excess capital over its fully
37
<PAGE>
phased-in capital requirements) at the beginning of the calendar year or (ii)
75% of its net income for the previous four quarters. Any additional capital
distributions would require prior regulatory approval. In the event the Bank's
capital fell below its regulatory requirements or the OTS notified it that it
was in need of more than normal supervision, the Bank's ability to make capital
distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice. In December 1994, the OTS proposed
amendments to its capital distribution regulation that would generally authorize
the payment of capital distributions without OTS approval provided the payment
does not make the institution undercapitalized within the meaning of the prompt
corrective action regulation. However, institutions in a holding company
structure would still have a prior notice requirement. At December 31, 1997, the
Bank is a Tier 1 Bank.
LIQUIDITY
The Bank is required to maintain an average daily balance of specified liquid
assets equal to a monthly average of not less than a specified percentage
(currently 4%) of its net withdrawable deposit accounts plus borrowings payable
in one year or less. Monetary penalties may be imposed for failure to meet
these liquidity requirements. The Bank has never been subject to monetary
penalties for failure to meet its liquidity requirements. The monthly average
liquidity ratio for the Bank for December 31, 1997 was 6.1% and exceeded the
then applicable requirement of 4%.
ASSESSMENTS
Savings institutions are required to pay assessments to the OTS to fund the
agency's operations. The general assessment, paid on a semi-annual basis, is
computed upon the savings institution's total assets, including consolidated
subsidiaries, as reported in the Bank's latest quarterly thrift financial
report. The assessment paid by the Bank for the year ended December 31, 1997
totaled $264,922.
BRANCHING
OTS regulations permit nationwide branching by federally chartered savings
institutions to the extent allowed by federal statute. This permits federal
savings institutions to establish interstate networks and to geographically
diversify their loan portfolios and lines of business. The OTS authority
preempts any state law purporting to regulate branching by federal savings
institutions.
THRIFT CHARTER
Congress has been considering legislation in various forms that would require
federal thrifts, such as the Bank, to convert their charters to national or
state bank charters. Recent legislation required the Treasury Department to
prepare for Congress a comprehensive study on development of a common charter
for federal savings associations and commercial banks; and, in the event that
the thrift charter was eliminated by January 1, 1999, would require the merger
of the BIF and SAIF into a single Deposit Insurance Fund on that date. The Bank
cannot determine whether, or in what form, such legislation may eventually be
enacted and there can be no assurance that any legislation that is enacted would
adversely affect the Bank and the Company.
TRANSACTIONS WITH RELATED PARTIES
Section 11 of HOLA provides that transactions between an insured subsidiary of
a holding company and an affiliate thereof will be subject to the restrictions
that apply to transactions between banks that are members of the Federal Reserve
System and their affiliates pursuant to Sections 23A and 23B of the Federal
Reserve Act ("FRA"). Generally, Sections 23A and 23B: (i) limit the extent to
which a financial institution or its subsidiaries may engage in "covered
transactions" with an "affiliate," to an amount equal to 10% of the
institution's capital and surplus, and limit all "covered transactions" in the
aggregate with all affiliates to an amount equal to 20% of such capital and
surplus; and (ii) require that all transactions with an affiliate, whether or
not "covered transactions," be on terms substantially the same, or at least as
favorable to the institution or subsidiary as those provided to a non-affiliate.
The term "covered transaction" includes the making of loans, purchase of assets,
issuance of a guarantee and similar types of transactions. Management believes
that the Bank is in compliance with the requirements of Sections 23A and 23B.
In addition to the restrictions that apply to financial institutions generally
under Sections 23A and 23B, Section 11 of the HOLA places
38
<PAGE>
three other restrictions on savings associations, including those that are part
of a holding company organization. First, savings associations may not make any
loan or extension of credit to an affiliate unless that affiliate is engaged
only in activities permissible for bank holding companies. Second, savings
associations may not purchase or invest in affiliate securities except for those
of a subsidiary. Finally, the Director is granted authority to impose more
stringent restrictions when justifiable for reasons of safety and soundness.
Extensions of credit by the Bank to executive officers, directors, and
principal stockholders and related interests of such persons are subject to
Sections 22(g) and 22(h) of the FRA and Subpart A of the Federal Reserve Board's
Regulation O. These rules prohibit loans to any such individual where the
aggregate amount exceeds an amount equal to 15% of an institution's unimpaired
capital and surplus plus an additional 10% of unimpaired capital and surplus in
the case of loans that are fully secured by readily marketable collateral,
and/or when the aggregate amount outstanding to all such individuals exceeds the
institution's unimpaired capital and unimpaired surplus. These rules also
restrict loans or extensions of credit in any manner to any of its executive
officers or directors, or to any person who directly or indirectly, or acting
through or in concert with one or more persons, owns, controls, or has the power
to vote more than 10% of any class of voting securities of such institution
("Principal Stockholder"), or to a related interest (i.e., any company
controlled by such executive officer, director, or Principal Stockholder).
ENFORCEMENT
Under the FDI Act, the OTS has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
all "institution-affiliated parties," including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
proceedings for receivership, conservatorship or termination of deposit
insurance. Civil penalties cover a wide range of violations and an amount to
$25,000 per day, or even $1 million per day in especially egregious cases.
Under the FDI Act, the FDIC has the authority to recommend to the Director of
the OTS enforcement action to be taken with respect to a particular savings
institution. If action is not taken by the Director, the FDIC has authority to
take such action under certain circumstances. Federal law also establishes
criminal penalties for certain violations.
STANDARDS FOR SAFETY AND SOUNDNESS
The federal banking agencies have adopted Interagency Guidelines Prescribing
Standards for Safety and Soundness ("Guidelines") and a final rule to implement
safety and soundness standards required under the FDI Act. The Guidelines set
forth the safety and soundness standards that the federal banking agencies use
to identify and address problems at insured depository institutions before
capital becomes impaired. The standards set forth in the Guidelines address
internal controls and information systems; internal audit system; credit
underwriting; loan documentation; interest rate risk exposure; asset growth; and
compensation, fees and benefits.
FEDERAL HOME LOAN BANK SYSTEM
The Bank is a member of the Federal Home Loan Bank ("FHLB") of Chicago, which
is one of the 12 regional FHLBs. As a member of the FHLB, the Bank is required
to purchase and maintain stock in the FHLB of Chicago in an amount equal to the
greater of 1% of its aggregate unpaid residential mortgage loans, home purchase
contracts or similar obligations at the beginning of each year, or 1/20 (or such
greater fraction as established by the FHLB) of outstanding FHLB advances. At
December 31, 1997 the Bank had $12.9 million in FHLB of Chicago stock, which was
in compliance with this requirement. FHLB advances must be secured by specific
types of collateral and may be obtained primarily for the purpose of providing
funds for residential housing finance.
The FHLBs are required to provide funds to cover certain obligations on bonds
issued to fund the resolution of insolvent thrifts and to contribute funds for
affordable housing programs. These requirements could reduce the amount of
dividends that the FHLBs pay to their members and could also result in the FHLBs
imposing a higher rate of interest on advances to their members. For the years
ended December 31, 1997, September 30, 1996 and 1995, dividends from the FHLB-
Chicago to the Bank amounted to $875,813, $544,634 and $572,577, respectively.
If dividends were reduced, or interest on future FHLB advances increased, the
Bank's net interest income might also be reduced.
39
<PAGE>
FEDERAL RESERVE SYSTEM
Federal Reserve Board regulations require all depository institutions to
maintain non-interest earning reserves against their transaction accounts
(primarily NOW checking accounts). Reserves of 3% must be maintained against
total transaction accounts of $47.8 million or less (after a $4.7 million
exemption), and an initial reserve of 10% (subject to adjustment by the Federal
Reserve Board to a level between 8% and 14%) must be maintained against that
portion of total transaction accounts in excess of such amount. At December 31,
1997, the Bank was in compliance with these reserve requirements. The balances
maintained to meet the reserve requirements imposed by the Federal Reserve Board
may be used to satisfy liquidity requirements that may be imposed by the OTS.
RECENT AND PROPOSED CHANGES IN ACCOUNTING RULES
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income," which is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. It is not expected that adoption of this statement
will have a material impact on the consolidated financial statements.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. It is not
expected that adoption of this statement will have a material impact on the
consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As its primary interest rate risk planning tool, the Bank utilizes a market
value model prepared by the OTS (the "OTS NPV model"), which is prepared
quarterly, based on the Bank's quarterly Thrift Financial Reports filed with the
OTS. The OTS NPV model measures the Bank's interest rate risk by approximating
the Bank's net portfolio value ("NPV"), which is the net present value of
expected cash flows from assets, liabilities and any off-balance sheet
contracts, under a range of interest rate scenarios, which range from a 400
basis point increase to a 400 basis point decrease in market interest rates
(measured in 100 basis point increments). The Bank's asset and liability
structure results in a decrease in NPV in a rising interest rate scenario and an
increase in NPV in a declining interest rate scenario. During periods of rising
interest rates, the value of monetary assets declines more rapidly than the
value of monetary liabilities rises. Conversely, during periods of falling
interest rates, the value of monetary assets rises more rapidly than the value
of monetary liabilities declines. However, the amount of change in value of
specific assets and liabilities due to changes in interest rates is not the same
in a rising rate environment as in a falling interest rate environment (i.e.,
the amount of value increase under a specific rate decline may not equal the
amount of value decrease under an identical upward interest rate movement). The
following table sets forth the Bank's NPV at December 31, 1997, as calculated by
the OTS, based on information provided by the Bank to the OTS.
40
<PAGE>
<TABLE>
<CAPTION>
Change in NPV as % of Economic
Interest Rates Net Portfolio Value Value of Assets
-------------------------------- -------------------
In Basis Points $ % NPV % (1)
(Rate Shock) Amount Change Change Ratio Change
- ----------------- -------------------------------- -------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
400 $ 50,851 $ (95,922) (65)% 4.02% (6.55)%
300 80,211 (66,562) (45) 6.16 (4.40)
200 107,772 (39,001) (27) 8.07 (2.50)
100 129,772 (17,001) (12) 9.51 (1.06)
Static 146,773 10.57
(100) 155,283 8,510 6 11.05 0.49
(200) 161,301 14,528 10 11.37 0.80
(300) 169,793 23,020 16 11.83 1.27
(400) 183,080 36,307 25 12.57 2.01
</TABLE>
(1) Based on the economic value of the Bank's assets assuming no change in
interest rates.
As shown by the table above, increases in interest rates will result in net
decreases in the Bank's net portfolio value, while decreases in interest rates
will result in smaller net increases in the Bank's net portfolio value. Because
a 200 basis point increase in interest rates would cause more than a 2% decrease
in the ratio of NPV to the economic value of the Bank's assets, the Bank is
considered by the OTS to have "above normal" interest rate risk. The result of
being characterized as having "above normal" interest rate risk is that, upon
the effectiveness of the interest rate risk component of the OTS' risk-based
capital requirements, the Bank would be required to hold additional capital. At
December 31, 1997, the Bank would have had its risk-based capital requirement
increased by $5.6 million had the interest rate risk component of the OTS risk-
based capital requirement been in effect at such date.
At December 31, 1997, the Bank's Board of Directors had adopted interest rate
risk target limits which established maximum potential decreases in the Bank's
NPV of 22%, 41%, 58% and 74% in the event of 1%, 2%, 3% and 4% immediate and
sustained increases in market interest rates, respectively. As indicated in the
table above, at December 31, 1997, the Bank was within such Board-approved
limits. The Bank's target limits are reviewed by the Board of Directors
regularly and are changed in light of market conditions and other factors.
Certain shortcomings are inherent in the methods of analysis presented in the
computation of NPV. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Asset/Liability Management."
41
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ALLIANCE BANCORP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31, September 30,
(In thousands, except share data) 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 10,839 6,069
Interest-bearing deposits 33,784 22,924
Investment securities available for sale, at fair value 91,475 1,998
Mortgage-backed securities available for sale, at fair value 213,957 5,367
Loans, net of allowance for losses of $5,395 at December 31, 1997
and $2,412 at September 30, 1996 957,897 590,722
Accrued interest receivable 8,353 3,431
Real estate 2,510 1,249
Premises and equipment, net 7,729 6,669
Stock in Federal Home Loan Bank of Chicago, at cost 12,855 7,445
Other assets 15,186 5,023
- --------------------------------------------------------------------------------------------------
$ 1,354,585 650,897
==================================================================================================
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 1,022,614 452,472
Borrowed funds 173,531 128,949
Collateralized mortgage obligations 1,065 2,542
Advances by borrowers for taxes and insurance 11,675 2,820
Accrued expenses and other liabilities 14,762 8,643
- --------------------------------------------------------------------------------------------------
Total liabilities 1,223,647 595,426
==================================================================================================
Stockholders' Equity:
Preferred stock, $.01 par value; authorized 1,500,000 shares;
none outstanding - -
Common stock, $.01 par value; authorized 11,000,000 shares at
December 31, 1997 and 6,000,000 shares at September 30, 1996;
8,176,234 shares issued at December 31, 1997;
4,185,128 shares issued at September 30, 1996 82 27
Additional paid-in capital 86,553 21,066
Retained earnings, substantially restricted 44,167 36,038
Treasury stock, at cost; 154,087 shares at December 31, 1997 and
142,500 shares at September 30, 1996 (1,502) (1,284)
Common stock purchased by Employee Stock Ownership Plan - (471)
Net unrealized gains on securities available for sale, net of tax 1,638 95
- --------------------------------------------------------------------------------------------------
Total stockholders' equity 130,938 55,471
==================================================================================================
Commitments and contingencies
- --------------------------------------------------------------------------------------------------
$ 1,354,585 650,897
==================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
42
<PAGE>
ALLIANCE BANCORP
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For The
For The Three For The Year
Year Months Ended
Ended Ended September 30,
Dec. 31, Dec. 31, -----------------
(In thousands, except per share amounts) 1997 1996 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest Income:
Loans $ 73,886 10,687 43,404 42,238
Mortgage-backed securities 11,664 113 603 1,614
Investment securities 5,904 161 661 1,191
Interest-bearing deposits 1,122 137 1,033 901
Commercial paper 37 - - -
Federal funds sold 15 - - -
- ----------------------------------------------------------------------------------------
Total interest income 92,628 11,098 45,701 45,944
- ----------------------------------------------------------------------------------------
Interest Expense:
Deposits 44,564 4,828 19,691 17,432
Borrowed funds 11,366 1,922 8,846 10,382
Collateralized mortgage obligations 187 74 430 628
- ----------------------------------------------------------------------------------------
Total interest expense 56,117 6,824 28,967 28,442
- ----------------------------------------------------------------------------------------
Net interest income 36,511 4,274 16,734 17,502
Provision for loan losses - - 50 185
- ----------------------------------------------------------------------------------------
Net interest income after provision
for loan losses 36,511 4,274 16,684 17,317
- ----------------------------------------------------------------------------------------
Noninterest Income:
Gain (loss) on sales of:
Loans and mortgage-backed securities
available for sale (153) 70 452 362
Investment securities available for sale - - - (18)
Real estate and other assets - - 61 300
Income (loss) from real estate operations (116) 78 302 613
Servicing fee income 457 115 445 417
ATM fee income 1,797 234 812 705
Other fees and commissions 13,366 2,653 10,400 4,720
Other 113 6 475 (351)
- ----------------------------------------------------------------------------------------
Total noninterest income 15,464 3,156 12,947 6,748
- ----------------------------------------------------------------------------------------
Noninterest Expense:
Compensation and benefits 19,248 3,135 12,832 9,096
Occupancy expense 4,343 805 2,983 2,162
Federal deposit insurance premiums 609 206 1,062 985
Federal deposit insurance special assessment - - 2,829 -
Advertising expense 1,124 138 718 324
ATM expense 1,387 190 568 530
Computer services 1,303 141 537 577
Other 7,238 1,051 4,167 3,023
- ----------------------------------------------------------------------------------------
Total noninterest expense 35,252 5,666 25,696 16,697
- ----------------------------------------------------------------------------------------
Income before income taxes 16,723 1,764 3,935 7,368
Income tax expense 6,474 685 861 2,909
- ----------------------------------------------------------------------------------------
Net income $ 10,249 1,079 3,074 4,459
- ----------------------------------------------------------------------------------------
Basic earnings per share $ 1.35 0.27 0.76 1.12
Diluted earnings per share $ 1.26 0.26 0.73 1.07
- ----------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
43
<PAGE>
ALLIANCE BANCORP
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Common Unrealized
(In thousands, except Additional Stock Stock Gains (Losses)
share and per share Common Paid-in Retained Treasury Acquired Acquired on Securities
amounts) Stock Capital Earnings Stock by ESOP by BRPs Available for Sale Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1994 $ 22 20,553 28,512 (1,284) (857) (230) - 46,716
Net income - - 4,459 - - - - 4,459
Proceeds from exercise of
stock options - 255 - - - - - 255
Tax benefit from stock
related compensation - 53 - - - - - 53
Principal payment on ESOP - - - - 171 - - 171
Stock split effected in
the form of a stock dividend 5 - (5) - - - - -
Distribution of BRP stock awards - - - - - 144 - 144
Cumulative effect of change in
accounting for securities available
for sale, net of tax - - - - - - (234) (234)
Change in net unrealized gains (losses)
on securities available for sale,
net of tax - - - - - - 413 413
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1995 27 20,861 32,966 (1,284) (686) (86) 179 51,977
Net income - - 3,074 - - - - 3,074
Proceeds from exercise of
stock options - 121 - - - - - 121
Tax benefit from stock
related compensation - 84 - - - - - 84
Principal payment on ESOP - - - - 215 - - 215
Fractional shares related
to stock split - - (2) - - - - (2)
Distribution of BRP stock awards - - - - - 86 - 86
Change in net unrealized gains
(losses) on securities
available for sale, net of tax - - - - - - (84) (84)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 27 21,066 36,038 (1,284) (471) - 95 55,471
Net income - - 1,079 - - - - 1,079
Principal payment on ESOP - - - - 43 - - 43
Change in net unrealized gains (losses)
on securities available for
sale, net of tax - - - - - - 33 33
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 27 21,066 37,117 (1,284) (428) - 128 56,626
Net income - - 10,249 - - - - 10,249
Issuance of 3,930,405 shares for
merger of Liberty Bancorp 26 65,106 - - (556) - - 64,576
Cash dividends declared,
$0.395 per share - - (3,167) - - - - (3,167)
Purchase of treasury stock - - - (218) - - - (218)
Proceeds from exercise of stock options 2 353 - - - - - 355
Tax benefit from stock
related compensation - 28 - - - - - 28
Principal payment on ESOP - - - - 984 - - 984
Stock split effected in
the form of a stock dividend 27 - (27) - - - - -
Fractional shares related
to stock split - - (5) - - - - (5)
Change in net unrealized gains (losses)
on securities available for
sale, net of tax - - - - - - 1,510 1,510
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 $ 82 86,553 44,167 (1,502) - - 1,638 130,938
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
ALLIANCE BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three
Year Months Year Ended
Ended Ended September 30,
Dec. 31, Dec. 31, -------------------
(In thousands) 1997 1996 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income $ 10,249 1,079 3,074 4,459
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,239 358 1,138 942
Amortization of deferred gain - - (65) (390)
Distribution of BRP awards - - 86 144
Provision for loan losses - - 50 185
Amortization of premiums, discounts, and deferred loan fees 1,383 109 389 89
Additions to deferred fees 197 (116) (497) (218)
Amortization of collateralized mortgage obligations discount 58 26 151 197
Originations of loans held for sale (555,662) (105,504) (460,556) (144,000)
Sale of loans originated for resale 540,817 90,600 471,016 130,747
(Gain) loss on sale of loans and mortgage-backed securities 153 (70) (452) (362)
Loss on sale of investment securities - - - 18
Gain on sale of real estate and other assets - - (61) (300)
(Increase) decrease in Stock in Federal Home Loan Bank of Chicago - - 1,770 (1,175)
(Increase) decrease in accrued interest receivable (721) (91) (156) 86
(Increase) decrease in other assets 3,536 (400) (1,046) 1,763
Increase (decrease) in accrued expenses and other liabilities (4,409) (2,253) 687 1,345
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (3,160) (16,262) 15,528 (6,470)
- -----------------------------------------------------------------------------------------------------------------
Cash Flows From Investing Activities:
Proceeds from sale of loans 61,918 - 4,803 12,527
Proceeds from sale of real estate 391 - 805 4,300
Sale of mortgage-backed securities held for sale - - - 20,214
Sale and maturities of investment securities available for sale - - - 19,957
Purchase of:
Mortgage-backed securities available for sale (120,349) - - -
Investment securities available for sale (100,051) - - -
Loans originated or purchased for investment (133,850) (23,893) (82,022) (118,154)
Purchase of premises and equipment (2,426) (201) (1,872) (857)
Net assets acquired through merger, net of cash acquired 16,417 - - (1,898)
Maturities of investment securities available for sale 35,000 - - -
Principal collected on loans 232,937 20,161 90,429 64,142
Principal collected on mortgage-backed securities 30,893 278 1,666 3,916
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 20,880 (3,655) 13,809 4,147
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
(continued)
45
<PAGE>
ALLIANCE BANCORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three
Year Months
Ended Ended Year Ended
Dec. 31, Dec. 31, September 30,
(continued) ------------------
(In thousands) 1997 1996 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash Flows From Financing Activities:
Net increase in deposits 44,958 10,397 6,967 26,069
Proceeds from borrowed funds 255,050 38,000 30,000 118,359
Repayment of borrowed funds (296,800) (35,049) (86,390) (109,371)
Repayment of collateralized mortgage obligations (1,236) (325) (1,962) (1,907)
Net increase (decrease) in advance payments by borrowers for taxes
and insurance (1,216) 5,099 (5,565) 4,634
Purchase of treasury stock (143) - - -
Cash dividends paid (2,285) - - -
Decrease in ESOP loan 984 43 215 171
Proceeds from options exercised 355 - 121 255
Cash paid in lieu of fractional shares related to stock split (5) - (2) -
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (338) 18,165 (56,616) 38,210
- -----------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 17,382 (1,752) (27,279) 35,887
Cash and cash equivalents at beginning of period 27,241 28,993 56,272 20,385
- -----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 44,623 27,241 28,993 56,272
=================================================================================================================
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest $ 56,459 6,821 29,173 28,178
Income taxes 4,726 100 2,478 2,461
Supplemental Disclosures of Noncash Activities:
Loans exchanged for mortgage-backed securities $ 60,234 1,907 36,469 19,734
Additions to real estate acquired in settlement of loans 272 187 353 -
=================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
46
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, DECEMBER 31, 1996, SEPTEMBER 30, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Alliance Bancorp ("Company") conform
to generally accepted accounting principles ("GAAP") and to practices within the
thrift industry. In preparing the consolidated financial statements, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities as of the date of the statement of financial condition
and revenues and expenses for the period. Actual results could differ from
those estimates. The Company changed its fiscal year to coincide with the
calendar year, compared to the September 30 fiscal year it used in the past.
The following is a description of the more significant policies which the
Company follows in preparing and presenting its consolidated financial
statements.
A. Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries, Liberty Lincoln Service Corporation II and Liberty
Federal Bank ("Bank"), and the Bank's wholly-owned subsidiaries: Preferred
Mortgage Associates, Ltd. ("Preferred"), Liberty Lincoln Service Corporation,
Liberty Financial Services Inc., and NASCOR II Corporation. All material
intercompany balances and transactions have been eliminated.
B. Investment and Mortgage-Backed Securities
Investments and mortgage-backed securities which the Company has the positive
intent and ability to hold to maturity are classified as "held-to-maturity" and
measured at amortized cost. Investments and mortgage-backed securities
purchased for the purpose of being sold are classified as "trading securities"
and measured at fair value with any changes in fair value included in earnings.
All other investments that are not classified as "held-to-maturity," or
"trading" are classified as "available for sale." Investments and mortgage-
backed securities available for sale are measured at fair value with any changes
in fair value reflected as a separate component of stockholders' equity, net of
tax. The Company has classified all investments and mortgage-backed securities
in the portfolio as available for sale.
Gains and losses on sales are determined using the specific identification
method. Premiums and discounts are amortized to interest income using the
interest method over the estimated remaining lives of the securities.
The Company also arranges for "swap" transactions with the Federal National
Mortgage Association ("FNMA") which involve the exchange of fixed-rate mortgage
loans for mortgage-backed securities. These mortgage-backed securities are
carried at the lower of cost or market.
C. Loans Receivable
Loans receivable are stated at unpaid principal balances adjusted for deferred
loan costs, unearned discounts, premiums, loans in process, and allowance for
loan losses. Loan origination fees and certain direct loan origination costs
are deferred, and the net fees or costs are recognized using the level-yield
method over the contractual life of the loans. Any unamortized net fees or
costs on loans sold or repaid prior to maturity are recognized in the period
such loans are sold or repaid.
The allowance for loan losses is increased by charges to income and decreased
by charge-offs (net of recoveries). Additions to the allowance for loan losses
are provided based upon a periodic evaluation by management. Management's
periodic evaluations of the adequacy of the allowance are based on the Company's
past loan loss experience, known and inherent risks in the portfolio, adverse
situations that may affect the borrower's ability to repay, estimated value of
any underlying collateral, and current and prospective economic conditions.
47
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the allowance for losses on loans
receivable. Such agencies may require the Company to recognize additions to the
provision for losses based on their judgments of information available to them
at the time of their examination. Interest income on loans is not recognized on
loans which are 90 days or greater delinquent and on loans which management
believes are uncollectable.
The Company adopted the provisions of SFAS No. 114 "Accounting by Creditors
for Impairment of a Loan" and SFAS No. 118 "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures" effective October 1,
1995. These statements apply to all loans that are identified for evaluation
except for large groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment. These loans include, but are not limited
to, credit card, residential mortgage and consumer installment loans.
Substantially all of the Company's lending is excluded from the provisions of
SFAS No. 114 and SFAS No. 118. Of the remaining loans which are to be evaluated
for impairment, management has determined through an internal loan review
process that there were no loans at December 31, 1997 and September 30, 1996,
nor during the years ended December 31, 1997 and September 30, 1996, which met
the definition of an impaired loan. A loan is considered impaired when it is
probable that a creditor will be unable to collect contractual principal and
interest due according to the contractual terms of the loan agreement.
D. Loans Held for Sale
Loans classified "held for sale" are comprised of one-to four-family real
estate loans originated for resale in the secondary market or to other
investors. Loans are identified as held for sale before or soon after
origination. Loans held for sale are accounted for at the lower of cost or
market, with each periodic lower of cost or market adjustment included in
earnings. The lower of cost or market values are determined on an individual
loan basis. Gains and losses on sales of loans are recognized based upon the
difference between the selling price and the carrying value of the related loans
sold.
E. Loan Servicing
Mortgage servicing rights, that are acquired through either the purchase or
origination of mortgage loans and are subsequently sold or securitized with
servicing retained, are capitalized based on an allocation of the total cost of
the mortgage loans to the mortgage servicing rights and to the loans (without
the mortgage servicing rights) based on their estimated relative fair values.
The allocation of the total cost of the loan between the mortgage servicing
rights and the loan results in increased gains on the sales of the loans,
reflecting the value of the servicing rights.
Mortgage servicing rights are periodically evaluated for impairment based on
the fair value of those rights. The fair value of the mortgage servicing rights
is determined by discounting the present value of estimated expected future cash
flows using a discount rate commensurate with the risks involved. This method
of valuation incorporates assumptions used for estimates of future servicing
income and expense, including assumptions about prepayments, default, and
interest rates. For purposes of measuring impairment, the loans underlying the
mortgage servicing rights are stratified on the basis of interest rate and type.
The amount of impairment is the amount by which the mortgage servicing rights,
net of accumulated amortization, exceed their fair value. Impairment, if any,
is recognized through a valuation allowance and a charge to current operations.
Mortgage servicing rights, net of valuation allowances, are amortized in
proportion to, and over the period of, the estimated net servicing revenue of
the underlying mortgages, which are collateralized by single family properties.
48
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
F. Foreclosed Real Estate
Real estate acquired through foreclosure, or deed in lieu of foreclosure, is
carried at the lower of fair value or the related loan balance on the property
at the date of foreclosure, net of costs to dispose. Valuations are
periodically performed by management subsequent to acquisition and charges are
made to operations if the carrying value of a property exceeds its estimated net
realizable value. Costs relating to the development and improvement of property
are capitalized to the extent the carrying value does not exceed the net
realizable value of the property. Costs relating to holding the property are
charged to expense.
G. Premises and Equipment
Premises and equipment are carried at cost less accumulated depreciation.
Depreciation is charged to operations under the straight-line method based on
the estimated useful lives of the assets, which are primarily forty years for
building and improvements, ten years for furniture and fixtures, three to five
years for equipment, and three years for automobiles. Amortization of leasehold
improvements is computed on the straight-line method over the lesser of the
lease term or useful life of the property.
H. Income Taxes
The Company and its subsidiaries file a consolidated Federal income tax
return. The provision for Federal and State taxes on income is based on earnings
reported in the financial statements.
The Company utilizes the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying the
applicable tax rate to differences between the financial statement carrying
amounts and the tax base of existing assets and liabilities. The effect on
deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date of any such tax law change.
I. Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the Statement 128
requirements. The following table sets forth the computation of basic and
diluted earnings per share for the periods indicated:
<TABLE>
<CAPTION>
Three
Year Months
Ended Ended Year Ended
Dec. 31, Dec. 31, September 30,
----------------------
(In thousands, except share data) 1997 1996 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net income $ 10,249 1,079 3,074 4,459
Denominator:
Basic earnings per share-weighted average shares 7,569,751 4,042,628 4,029,553 3,993,867
Effect of dilutive securities-stock options 545,245 182,130 170,037 165,580
Diluted earnings per share-adjusted weighted
average shares 8,114,996 4,224,758 4,199,590 4,159,447
Basic earnings per share $ 1.35 0.27 0.76 1.12
Diluted earnings per share $ 1.26 0.26 0.73 1.07
</TABLE>
49
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company declared on August 22, 1997, a 50% common stock split effected in
the form of a stock dividend, payable September 26, 1997, to stockholders of
record on September 12, 1997. All share and per share amounts have been
restated.
J. Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks and interest-bearing deposits.
K. Reclassifications
Certain reclassifications of prior year amounts have been made to conform with
the current year presentation.
50
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
2. INVESTMENT SECURITIES AVAILABLE FOR SALE
Investment securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
- -------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------------
Available for sale:
<S> <C> <C> <C> <C>
United States government and agency
obligations $ 89,086 785 (103) 89,768
Other investment securities 1,497 210 - 1,707
- -------------------------------------------------------------------------------------
$ 90,583 995 (103) 91,475
=====================================================================================
Weighted average interest rate 7.53%
===================================================
</TABLE>
<TABLE>
<CAPTION>
(In thousands) September 30, 1996
- -------------------------------------------------------------------------------------
Available for sale:
<S> <C> <C> <C> <C>
United States government and agency
obligations $ 2,001 - (3) 1,998
=====================================================================================
Weighted average interest rate 5.97%
===================================================
</TABLE>
The maturities of investment securities available for sale are summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1997
- -------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 4,481 3 - 4,484
Due in one to five years 18,183 167 (14) 18,336
Due in five to ten years 10,210 261 - 10,471
Due after ten years 57,709 564 (89) 58,184
- -------------------------------------------------------------------------------------
$ 90,583 995 (103) 91,475
=====================================================================================
</TABLE>
There were no sales for the year ended December 31, 1997, the three months
ended December 31, 1996, and the year ended September 30, 1996. Proceeds from
the sale of investment securities available for sale during 1995 were $15.0
million. Gross gains of $680 and gross losses of $18,350 were realized on those
sales.
51
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. MORTGAGE-BACKED SECURITIES AVAILABLE FOR SALE
Mortgage-backed securities available for sale are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997
- -----------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands) Cost Gains Losses Value
- -----------------------------------------------------------------------------------------
Available for sale:
<S> <C> <C> <C> <C>
Government National Mortgage Assoc. $ 90,910 787 (21) 91,676
Federal Home Loan Mortgage Corporation 33,438 368 (213) 33,593
Federal National Mortgage Association 56,147 551 (147) 56,551
Collateralized mortgage obligations 31,872 276 (11) 32,137
- -----------------------------------------------------------------------------------------
$ 212,367 1,982 (392) 213,957
- -----------------------------------------------------------------------------------------
Weighted average interest rate 7.24%
- -------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(In thousands) September 30, 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
Federal Home Loan Mortgage Corporation $ 457 4 (1) 460
Federal National Mortgage Association 4,762 145 - 4,907
- -----------------------------------------------------------------------------------------
$ 5,219 149 (1) 5,367
- -----------------------------------------------------------------------------------------
Weighted average interest rate 8.73%
- -----------------------------------------------------------------------------------------
</TABLE>
Included above are mortgage-backed securities held by NASCOR II Corporation
with an amortized cost of $3,878,159 and $5,163,746 as of December 31, 1997 and
September 30, 1996, respectively, and market values of $4,077,166 and $5,313,897
as of December 31, 1997 and September 30, 1996, respectively.
There were no sales for the year ended December 31, 1997, the three
months ended December 31, 1996, and the year ended September 30, 1996. Proceeds
from the sale of mortgage-backed securities available for sale during 1995 were
$20.2 million. Gross gains of $264,763 and gross losses of $27,563 were
realized on those sales.
52
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
4. LOANS
Loans are summarized as follows:
<TABLE>
<CAPTION>
December 31, September 30,
(In thousands) 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Real estate loans:
One-to four-family:
Held for investment $ 638,545 470,057
Held for sale 45,093 16,984
Multi-family 74,144 25,217
Commercial real estate 54,424 19,461
Construction loans 30,274 7,418
Land 2,910 2,579
- -----------------------------------------------------------------------
Total real estate loans 845,390 541,716
Other loans:
Commercial leases 35,502 -
Home equity lines of credit 81,024 48,223
Commercial business loans 4,286 478
Consumer loans 7,835 4,542
- -----------------------------------------------------------------------
Total other loans 128,647 53,243
- -----------------------------------------------------------------------
Total all loans 974,037 594,959
Add (deduct):
Loans in process (14,048) (4,053)
Premiums and deferred loan fees, net 3,303 2,228
Allowance for loan losses (5,395) (2,412)
- -----------------------------------------------------------------------
$ 957,897 590,722
- -----------------------------------------------------------------------
Weighted average interest rate 7.69% 7.12
- -----------------------------------------------------------------------
</TABLE>
Adjustable-rate mortgage loans were $551.6 million and $472.9 million at
December 31, 1997 and September 30, 1996, respectively. The weighted average
interest rate for adjustable-rate mortgage loans was 7.54% and 7.11% at December
31, 1997 and September 30, 1996, respectively.
The following is a summary of the changes in the allowance for loan losses:
<TABLE>
<CAPTION>
For The Year For The Three
Ended Months Ended For The Year Ended
December 31, December 31, September 30,
----------------------
(In thousands) 1997 1996 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 2,272 2,412 2,589 2,748
Balance acquired in merger 3,203 - - -
Provision for loan losses - - 50 185
Charge-offs, net of recoveries (80) (140) (227) (344)
- ---------------------------------------------------------------------------------------
Balance at end of period $ 5,395 2,272 2,412 2,589
- ---------------------------------------------------------------------------------------
</TABLE>
53
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Non-accrual loans were as follows:
<TABLE>
<CAPTION>
Percent of
Year Number Amount Total Loans
- -------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
December 31, 1997 40 $ 3,022 0.31%
September 30, 1996 8 932 0.16
September 30, 1995 31 1,300 0.21
</TABLE>
Mortgage loans serviced for others are not included in the accompanying
consolidated statements of financial condition. The unpaid principal balances of
these loans were $281,715,909, $232,308,169 and $220,930,582 at December 31,
1997, September 30, 1996 and 1995, respectively. Included in loans serviced for
others are mortgages, totaling $743,782, $1,007,568 and $1,108,735 at December
31, 1997, September 30, 1996 and 1995, respectively, which require the Bank to
repurchase the loans under stipulated circumstances. Custodial balances
maintained in connection with the mortgage loans serviced for others and
included in deposits and advance payments by borrowers for taxes and insurance
were $7,389,748, $2,366,590 and $4,424,133 at December 31, 1997, September 30,
1996 and 1995, respectively.
The following is a summary of changes in capitalized mortgage servicing rights
activity for the periods indicated:
<TABLE>
<CAPTION>
For The Year For The Three
Ended Months Ended For The Year Ended
December 31, December 31, September 30,
----------------------
(In thousands) 1997 1996 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 770 803 624 691
Additions 635 27 402 219
Amortization (396) (60) (222) (286)
Change in valuation allowance 1 - (1) -
- ---------------------------------------------------------------------------------------
Balance at end of period $ 1,010 770 803 624
- ---------------------------------------------------------------------------------------
</TABLE>
The fair value of the servicing rights at December 31, 1997, December 31,
1996, and September 30, 1996 was $1,869,113, $855,507, and $924,858,
respectively.
5. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
(In thousands) December 31, 1997 September 30, 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Investment securities available for sale $ 914 -
Mortgage-backed securities available for sale 1,360 79
Loans 6,079 3,352
- -----------------------------------------------------------------------------------------
$ 8,353 3,431
- -----------------------------------------------------------------------------------------
</TABLE>
54
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
6. REAL ESTATE
Real estate consisted of the following:
<TABLE>
<CAPTION>
(In thousands) December 31, 1997 September 30, 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
Real estate owned - residential $ 679 218
Real estate held for development and sale 800 -
Real estate held for investment 1,031 1,031
- -------------------------------------------------------------------------------------
$ 2,510 1,249
- -------------------------------------------------------------------------------------
</TABLE>
Gains (losses) on sales of real estate were $18,718, ($21,939), and $298,604
for the years ended December 31, 1997, September 30, 1996 and 1995,
respectively. There were no sales for the three months ended December 31, 1996.
7. PREMISES AND EQUIPMENT
Premises and equipment, at cost, less accumulated depreciation and
amortization are summarized as follows:
<TABLE>
<CAPTION>
(In thousands) December 31, 1997 September 30, 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 1,040 1,040
Office buildings and improvements 5,325 5,158
Furniture, fixtures, and equipment 10,672 8,673
Leasehold improvements 1,821 1,482
- ------------------------------------------------------------------------------------------
18,858 16,353
Less accumulated depreciation and amortization 11,129 9,684
- ------------------------------------------------------------------------------------------
$ 7,729 6,669
- ------------------------------------------------------------------------------------------
</TABLE>
Included in occupancy expense is depreciation and amortization of premises and
equipment of $1,237,694, $269,510, $911,957, and $735,436 for the year ended
December 31, 1997, three months ended December 31, 1996, and the years ended
September 30, 1996 and 1995, respectively.
55
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
<TABLE>
<CAPTION>
8. DEPOSITS s
<S> <C>
</TABLE>
Deposits are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1996
--------------------------------- -----------------------------------
Weighted Percent Weighted Percent
Average of Total Average of Total
(Dollars in thousands) Rate Amount Deposits Rate Amount Deposits
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
DEMAND ACCOUNTS:
Commercial NOW - % $ 3,531 0.35% - % $ 12,887 2.85%
NOW 0.69 87,786 8.59 0.75 45,676 10.09
Regular savings 2.53 127,604 12.48 2.53 78,853 17.43
Money market 3.32 75,115 7.35 3.29 50,355 11.13
- -------------------------------------------------------------------------------------------------
2.15 294,036 28.77 2.13 187,771 41.50
- -------------------------------------------------------------------------------------------------
CERTIFICATE ACCOUNTS:
Three Months Plus 5.13 12,421 1.22 4.88 4,392 0.97
Six Months Plus 6.02 323,510 31.64 5.41 78,357 17.32
One Year Plus 5.83 99,064 9.69 5.77 54,257 11.99
Two Year Plus 6.01 70,410 6.88 5.64 10,079 2.23
Three Year Plus 5.91 2,753 0.27 5.13 3,087 0.68
Four Year Plus 6.31 13,708 1.34 5.20 1,274 0.28
Five Year Plus 6.38 103,683 10.14 6.24 64,768 14.31
Jumbo 6.17 54,476 5.33 5.85 24,425 5.40
Retirement and other 5.90 48,243 4.72 5.60 24,062 5.32
- -------------------------------------------------------------------------------------------------
6.04 728,268 71.23 5.74 264,701 58.50
- -------------------------------------------------------------------------------------------------
4.92% 1,022,304 100.00% 4.24% 452,472 100.00%
Unamortized premium 310 -
- -------------------------------------------------------------------------------------------------
$ 1,022,614 $ 452,472
- -------------------------------------------------------------------------------------------------
</TABLE>
Contractual maturities of certificate accounts at December 31, 1997 are as
follows:
(In thousands)
- ---------------------------------
<TABLE>
<S> <C>
Less than 12 months $ 549,493
12 to 24 months 99,737
25 to 36 months 54,008
Over 36 months 25,030
- ---------------------------------
$ 728,268
- ---------------------------------
</TABLE>
The aggregate amount of certificate accounts with a balance of $100,000 or
greater was $127.3 million at December 31, 1997 and $44.8 million at September
30, 1996.
56
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Interest expense for deposit accounts is summarized as follows:
<TABLE>
<CAPTION>
For The Year For The Three For The Year Ended
Ended Months Ended September 30,
December 31, December 31, --------------------------------------
(In thousands) 1997 1996 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NOW accounts $ 783 90 364 381
Money market accounts 2,465 415 1,785 2,024
Regular savings accounts 3,334 486 2,094 2,426
Certificate accounts 37,982 3,837 15,448 12,601
- ------------------------------------------------------------------------------------------------------------
$ 44,564 4,828 19,691 17,432
- ------------------------------------------------------------------------------------------------------------
</TABLE>
9. BORROWED FUNDS
In connection with the initial public offering, the Bank established a
leveraged Employee Stock Ownership Plan ("ESOP"). The ESOP was funded by the
proceeds from a $1.2 million loan at a rate of prime and one half of one
percent, maturing June 30, 1999. The loan was secured by shares of the Company
purchased with the proceeds of the loan. In connection with the merger, the ESOP
plans maintained by Hinsdale Financial Corporation and Liberty Bancorp, Inc.
were terminated. A number of the unallocated shares held by each ESOP were sold
by each ESOP, in a manner which complied with the Internal Revenue Code and
ERISA, in order to provide sufficient proceeds to repay the outstanding ESOP
loans.
The Bank has adopted a collateral pledge agreement whereby the Bank has
agreed to at all times keep on hand, free of all other pledges, liens, and
encumbrances, first mortgages with unpaid principal balances aggregating no less
than 167% of the outstanding secured advances from the Federal Home Loan Bank
("FHLB") of Chicago. All stock in the FHLB of Chicago is pledged as additional
collateral for these advances.
The Bank enters into sales of securities under agreement to repurchase the
identical securities ("reverse repurchase agreements") with nationally
recognized primary securities dealers. The reverse repurchase agreements are
treated as financings and the obligations to repurchase securities sold are
reflected as borrowed funds in the consolidated statements of financial
condition. The dollar amount of the securities underlying the agreements remain
in the asset accounts. Securities sold under agreements to repurchase consisted
of mortgage-backed securities reported as available for sale with an amortized
cost of $10.1 million and a fair value of $10.2 million at December 31, 1997.
The securities underlying the agreements were delivered to the dealers who
arranged the transactions.
57
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Borrowed funds are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1996
-------------------------------------------
Weighted Weighted
Average Average
(Dollars in thousands) Rate Amount Rate Amount
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Advances from the FHLB of Chicago due in:
1997 - % $ - 6.10 108,900
1998 6.04 137,750 6.70 15,000
1999 6.19 3,800 - -
2000 6.01 9,500 6.00 5,000
2002 5.53 12,500 - -
- ------------------------------------------------------------------------------------------------
163,550 128,900
Securities sold under agreements to repurchase 5.95 9,981 - -
Drafts payable - - - 49
- ------------------------------------------------------------------------------------------------
$ 173,531 128,949
================================================================================================
</TABLE>
10. COLLATERALIZED MORTGAGE OBLIGATIONS
The Bank participated in the issuance of collateralized mortgage obligations
("Obligations") in 1985 through NASCOR II Corporation, its wholly-owned limited-
purpose finance subsidiary. The Bank contributed mortgage-backed securities to
NASCOR II Corporation which, in turn, pledged the securities to an independent
trustee as collateral securing the Obligations. Substantially all of the
collections of principal and interest from the underlying collateral are paid
through to the holders of the Obligations.
The Obligations were issued in two series, each originally having four
maturity classes. Payment of principal is first allocated pro rata to the class
of bonds of each series having the earliest stated maturity, until such class
has been paid in full.
The classes by series are as follows:
<TABLE>
<CAPTION>
Coupon December 31, September 30, Stated
(Dollars in thousands) Rate 1997 1996 Maturity
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series I:
Class Z 7.90% $ 829 1,948 April 2010
Series II:
Class Z 9.15 248 690 October 2011
- ------------------------------------------------------------------------------------
1,077 2,638
Less unamortized discounts
including underwriting costs 12 96
- ------------------------------------------------------------------------------------
$ 1,065 2,542
====================================================================================
</TABLE>
The actual maturity of each obligation will vary depending upon the timing of
cash receipts from the underlying collateral. Classes A, B and C of Series I and
II have prepaid.
The Obligations are accounted for as borrowing transactions that are recorded
as liabilities in the consolidated financial statements. Mortgage-backed
securities and cash held by the trustees with an aggregate market value of
$4,078,070 and $5,317,000 were pledged as collateral for the Obligations at
December 31, 1997 and September 30, 1996, respectively.
58
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
11. INCOME TAXES
Federal and State income tax expense (benefit) is summarized as follows:
<TABLE>
<CAPTION>
For The Year For The Three
Ended Months Ended For The Year Ended
December 31, December 31, September 30,
----------------------
(In thousands) 1997 1996 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal:
Current $ 6,559 632 1,486 3,089
Deferred (1,044) (51) (557) (509)
- -----------------------------------------------------------------------------------
5,515 581 929 2,580
State:
Current 1,190 115 59 445
Deferred (231) (11) (127) (116)
- -----------------------------------------------------------------------------------
959 104 (68) 329
- -----------------------------------------------------------------------------------
Total income tax expense $ 6,474 685 861 2,909
===================================================================================
</TABLE>
The reasons for the difference between the effective income tax and the
corporate Federal income tax are as follows:
<TABLE>
<CAPTION>
For The
For The Year Three Months
Ended Ended For The Year Ended
December 31, December 31, September 30,
---------------------
(In thousands) 1997 1996 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal income tax at 35% rate in 1997 and
34% rate for prior periods $ 5,853 600 1,338 2,505
Items affecting Federal income tax rate:
Valuation allowance - - (350) -
Federal tax refund - - (104) -
Capital loss valuation allowance - - (38) -
State income taxes 656 68 19 322
Other, net (35) 17 (4) 82
- -------------------------------------------------------------------------------------------------
Income tax expense $ 6,474 685 861 2,909
=================================================================================================
</TABLE>
59
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The significant components of deferred income taxes are as follows:
<TABLE>
<CAPTION>
For The
For The Three Months
Year Ended Ended For The Year Ended
December 31, December 31, September 30,
-------------------
(In thousands) 1997 1996 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Deferred taxes attributable to changes in gross deferred tax assets and
liabilities $ (1,140) (62) (155) (472)
Decrease in beginning-of-period balance
of the valuation allowance for
deferred taxes (135) - (529) (153)
- ----------------------------------------------------------------------------------------------------------------------------------
$ (1,275) (62) (684) (625)
==================================================================================================================================
</TABLE>
The tax effects of existing temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax liabilities are
as follows:
<TABLE>
<CAPTION>
December 31, December 31, September 30,
(In thousands) 1997 1996 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
General allowances for losses on loans $ 2,112 880 940
Interest income acceleration for tax purposes - 266 266
Accrued pension - 371 347
Unrealized capital loss 51 110 110
Illinois net operating loss carryforward 105 241 241
Purchase accounting 4,492 - -
Other 64 19 34
- -----------------------------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets 6,824 1,887 1,938
Less valuation allowance (156) (291) (291)
- -----------------------------------------------------------------------------------------------------------------------------------
Net deferred tax assets 6,668 1,596 1,647
Deferred tax liabilities:
FHLB stock dividends (346) (157) (157)
Loan fees (793) (1,233) (1,281)
Excess servicing (83) (114) (124)
Depreciation (479) (469) (408)
Tax bad debt reserve in excess of base year amount (1,249) (373) (373)
Mortgage brokerage fees (296) (574) (666)
Unrealized gains on securities available for sale (844) (66) (49)
Other (44) - (41)
- -----------------------------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities (4,134) (2,986) (3,099)
- -----------------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset (liability) $ 2,534 (1,390) (1,452)
===================================================================================================================================
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1996, was
$291,000. The net change in the total valuation allowance for the year ended
December 31, 1997 was a decrease of $135,000. The reversal of the SFAS 109
valuation allowance was made due to the utilization of state net operating
losses and capital loss. Management believes it is more likely than not that the
results of future operations will generate sufficient taxable income to realize
the deferred tax assets.
60
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Retained earnings at December 31, 1997 includes approximately $19.9 million of
tax bad debt reserves for which no Federal or State income tax liability has
been provided. If in the future this amount, or a portion thereof, is used for
certain purposes, then a Federal and State tax liability, at the then current
corporate tax rate, will be imposed on the amounts so used.
12. PENSION PLAN
The Bank had a defined benefit pension plan covering all salaried employees
meeting certain eligibility requirements. The plan was noncontributory and the
Bank was funding all of the required annual contributions. In connection with
the merger, the Pension Plans maintained by Hinsdale Federal Bank and Liberty
Federal Savings Bank were terminated.
The Hinsdale Federal Bank's pension plan financial data was as follows:
<TABLE>
<CAPTION>
(In thousands) December 31, 1997 September 30, 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
FUNDED STATUS
Actuarial present value of benefit obligations:
Accumulated benefits obligation, including vested
benefits of $1,814 at September 30, 1996 $ - 1,984
- ----------------------------------------------------------------------------------------------
Plan assets at fair value - 2,232
Projected benefit obligations - 3,094
- ----------------------------------------------------------------------------------------------
Excess of projected benefit obligation over plan assets - (862)
Unrecognized net loss - 364
Unrecognized prior service cost - (41)
Unrecognized net transition asset - (355)
- ----------------------------------------------------------------------------------------------
Accrued pension liability $ - (894)
- ----------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
For The
For The Year Three Months For The Year Ended
Ended Ended September 30,
December 31, December 31, --------------------
(In thousands) 1997 1996 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET PERIODIC PENSION COST
Service costs $ 33 62 265 231
Interest cost on projected benefit obligation 117 56 166 239
Actual return on assets (157) (41) (149) (277)
Net amortization and deferral (44) (14) (18) (5)
Effect of curtailment (191) - - -
Effect of settlement 505 - - -
- -----------------------------------------------------------------------------------------------------
Net periodic pension cost $ 263 63 264 188
- -----------------------------------------------------------------------------------------------------
</TABLE>
61
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The rates used in the actuarial valuation were as follows:
<TABLE>
<CAPTION>
September 30,
1996
- ---------------------------------------------------------
<S> <C>
Discount rate 7.75%
Long-term rate of return 8.00%
Salary progression 5.00%
=========================================================
</TABLE>
13. OTHER POSTRETIREMENT BENEFIT PLAN
Liberty Bancorp maintained a post-employment medical program for the benefit
of certain of its employees who have attained the age 55 and have 10 years of
service with Liberty Bancorp or a Liberty Bancorp subsidiary. In conjunction
with the merger, Liberty Bancorp discontinued the availability of the post-
retirement medical program for all employees or former employees who were not
eligible for or receiving benefits under the program, except that any employee
who would satisfy the eligibility requirements if 5 years are added to his age
or service or a combination of the two (i.e., 2 years to age and 3 years to
service) will continue to be eligible for the post-retirement medical program
upon termination of employment with Liberty Bancorp or Alliance Bancorp.
The plan is contributory, with retiree contributions adjusted annually, and
contains other cost-sharing features such as deductibles and coinsurance. The
accounting for the plan anticipates future cost-sharing changes to the written
plan that are consistent with the Bank's expressed intent to increase the
retiree contribution rate annually for the expected general inflation rate for
that year. The Bank's policy is to fund the cost of medical benefits in amounts
determined at the discretion of management.
The Bank's postretirement plan financial data as of and for the year ended
December 31, 1997 is as follows:
<TABLE>
<CAPTION>
(In thousands)
- -------------------------------------------------------------------------------
<S> <C>
Accumulated postretirement benefit obligation $ 794
Unrecognized net gain 332
- -------------------------------------------------------------------------------
Accrued postretirement benefit obligation $ 1,126
Net period postretirement benefit cost:
Interest cost $ 55
Amortization of unrecognized gain (50)
- -------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 5
===============================================================================
</TABLE>
In measuring benefit amounts for the plan year ended December 31, 1997, the
health care cost trend rate for medical benefits of 8.00% for 1997, 7.00% for
1998, 6.00% for 1999, and 5.5% for 2000 and thereafter was assumed. The health
care cost trend rate for dental benefits of 5.5% for 1997 and future years was
assumed. Increasing the combined health care cost trend rate by one percentage
point each year would increase the accumulated postretirement benefit obligation
as of December 31, 1997 by approximately $112,330, and the service and interest
cost components of net periodic postretirement benefit cost for the year ended
December 31, 1997 by approximately $6,631. The weighted-average discount rate
used in determining the accumulated postretirement benefit obligation was 7.00%
at December 31, 1997.
62
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. LEASE COMMITMENTS
Certain operations of the Company are conducted from leased offices under
short-term operating lease agreements which are generally renewable at the
option of the Company. Operating expenses include rental expense for office
space, net of sublease rental income, of $1,500,000, $305,000, $1,206,000 and
$979,000 for the year ended December 31, 1997, the three months ended December
31, 1996 and the years ended September 30, 1996 and 1995, respectively.
The projected minimum rentals under existing leases are as follows:
<TABLE>
<CAPTION>
(In thousands) Year Amount
- -------------------------------------------------------------------------------
<S> <C> <C>
1998 $ 1,298
1999 1,234
2000 1,103
2001 961
2002 916
Thereafter 2,542
- -------------------------------------------------------------------------------
$ 8,054
===============================================================================
</TABLE>
15. REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory, and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weighting and other factors. OTS regulations require all savings institutions to
maintain a minimum regulatory tangible capital ratio equal to 1.5% of total
assets, a minimum 3.0% leverage capital ratio, and 8.0% risk-based capital ratio
requirement. As of December 31, 1997, the Bank meets all capital adequacy
requirements to which it is subject.
OTS regulations require that in meeting the leverage ratio, tangible and risk-
based capital standards, savings institutions must deduct investments in and
loans to subsidiaries engaged in activities not permissible for a national bank.
A transitional rule which phases in the deduction from capital over a five-year
period is provided for a savings institution's investment in and loans to a
nonqualifying subsidiary as of April 12, 1989. In December 1992, the Bank
received approval to use the delayed deduction phase-in schedule allowable under
current legislation. The delayed phase-in schedule extends the deduction of
investments in and loans to a nonqualifying subsidiary to July 1, 1996, at which
time 100% will be required to be deducted. This was a change from the 100%
deduction required July 1, 1994. At December 31, 1997 the Bank had $354,000
investments in and loans to subsidiaries required to be deducted.
As of December 31, 1997, the most recent notification from the OTS categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. There are no conditions or events since that notification
that management believes have changed the Bank's category.
63
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Bank's actual capital amounts and ratios as well as minimum amounts and
ratios required for capital adequacy and prompt corrective action provisions are
presented below:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------- -------------------- -----------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
- --------------------------- ---------------- -------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Tangible capital
(to total assets) $ 113,751 8.40% $ 20,313 1.50% N/A
Core capital
(to total assets) $ 115,267 8.50% $ 40,671 3.00% $ 67,784 5.00%
Total capital
(to risk-weighted assets) $ 119,519 16.48% $ 58,038 8.00% $ 72,548 10.00%
Core capital
(to risk-weighted assets) $ 115,267 15.89% N/A $ 43,529 6.00%
As of September 30, 1996
Tangible capital
(to total assets) $ 50,952 7.85% $ 9,742 1.50% N/A
Core capital
(to total assets) $ 52,555 8.07% $ 19,533 3.00% $ 32,555 5.00%
Total capital
(to risk-weighted assets) $ 53,911 13.72% $ 31,444 8.00% $ 39,305 10.00%
Core capital
(to risk-weighted assets) $ 52,555 13.37% N/A $ 23,583 6.00%
</TABLE>
A reconciliation of the Bank's equity capital at December 31, 1997 and
September 30, 1996 is as follows:
<TABLE>
<CAPTION>
(In thousands) December 31, 1997 September 30, 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Stockholders' equity $ 130,938 55,471
Less:
Holding Company stockholders' equity not available
for regulatory capital 10,953 2,821
Goodwill and other intangibles 1,516 1,603
Disallowed servicing assets and deferred tax assets 2,865 -
Investments in and advances to nonincludable subsidiaries
required to be deducted 354 -
Net unrealized gains on securities available for sale,
net of tax 1,499 95
- ---------------------------------------------------------------------------------------------------------------------------
Stockholders' equity of the Bank $ 113,751 50,952
===========================================================================================================================
</TABLE>
64
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
16. OFFICER, DIRECTOR AND EMPLOYEE PLANS
In conjunction with the Bank's conversion, the Company formed an ESOP. The
ESOP covered substantially all employees of the Bank with more than one year of
employment who had attained the age of 21. The ESOP borrowed $1.2 million from
an unaffiliated third party lender and purchased 225,000 common shares of the
Company issued in the conversion. In accordance with generally accepted
accounting principles, the balance of the ESOP loan was included in borrowed
funds in the Company's consolidated statement of financial condition and
stockholders' equity had been reduced by the same amount. Contributions to the
ESOP by the Bank were made to fund the principal and interest payments on the
debt of the ESOP. Total contributions made to the ESOP were $6,667, $53,399,
$223,790, and $241,117, for the year ended December 31, 1997, for the three
months ended December 31, 1996 and for the years ended September 30, 1996 and
1995, respectively. In conjunction with the merger, the ESOP plan was
terminated. A number of the unallocated shares held by the ESOP were sold by the
ESOP, in a manner which complied with the Internal Revenue Code and ERISA, in
order to provide sufficient proceeds to repay the outstanding ESOP loan.
Bank Recognition and Retention Plans (BRPs)
In conjunction with the conversion, the Company formed three BRPs, which
purchased 19,195 common shares of the Company issued in the conversion. An
additional 61,596 common shares were purchased subsequent to the conversion. The
funds used to acquire the BRPs shares were contributed by the Bank. These shares
are available for issuance to employees in key management positions with the
Bank. At December 31, 1997, a total of 4,843 plan share awards were available
for future grants under this plan. The aggregate purchase price of all shares
owned by the BRPs was reflected as a reduction of stockholders' equity and as an
amortization expense as the Bank's employees became vested in their stock
awards. As of December 31, 1997, 75,948 shares were vested and distributed to
employees. For the years ended September 30, 1996 and 1995, $63,407 and
$137,854, respectively, was reflected as compensation expense.
401(K) Plan and Trust
The Plan is a qualified plan covering all employees of the Company who have
completed at least 1,000 hours of service for the Company within a twelve
consecutive month period and are age 21 or older. The Company adopted the Plan,
effective January 1, 1993, for the exclusive benefit of eligible employees and
their beneficiaries. The Plan was effectively amended in conjunction with the
merger to incorporate Liberty Federal Savings Bank and Preferred Mortgage
Associates, Ltd. employees. The Plan also provides benefits in the event of
death, disability, or other termination of employment. Participants may make
contributions to the Plan from 1% to 15% of their earnings, subject to Internal
Revenue Service limitations. Non-elective contributions are not permitted.
Matching contributions can be made at the Company's discretion each Plan year.
In 1997, the Company elected to make a contribution to the Plan totaling,
$103,827.
65
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Stock Option Plans
The Company and its shareholders adopted Incentive Stock Option Plans for the
benefit of officers and key employees of the Company or its affiliates and an
Incentive Stock Option Plan for Outside Directors of the Company as follows:
<TABLE>
<CAPTION>
Available Shares
For Grant
Plan Name Authorized Shares at December 31, 1997
- ------------------------------------- ----------------- --------------------
<S> <C> <C>
1992 Incentive Stock Option Plan 225,327 5,898
1992 Incentive Stock Option Plan for
Outside Directors 184,359 31,101
1994 Incentive Stock Option Plan 187,500 20,974
1997 Incentive Stock Benefit Plan 600,000 600,000
</TABLE>
The term of the options issued under all plans expires ten years from the date
of grant. The options granted under the plans are exercisable not earlier than
one year after the date of grant and are subject to a vesting schedule, with the
exception of the Directors' Plan, which options became immediately exercisable
at date of grant.
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related Interpretations in accounting for its stock option
plans. Accordingly, no compensation cost has been recognized for its Incentive
Stock Option Plans. Had compensation cost for the Company's stock option plans
been determined based on the fair value of the options at the grant dates for
awards under those plans consistent with the method of SFAS No. 123, "Accounting
for Stock-Based Compensation," the Company's net income and earnings per share
would have been reduced to the pro forma amounts indicated in the table below:
<TABLE>
<CAPTION>
For The Year For The Three For The Year
Ended Months Ended Ended
(In thousands, December 31, December 31, September 30,
except per share data) 1997 1996 1996
- ---------------------------- -------------- ------------- -------------
<S> <C> <C> <C>
Net Income
As Reported $ 10,249 1,079 3,074
Pro Forma 9,724 1,006 2,870
Basic Earnings Per Share
As Reported $ 1.35 0.27 0.76
Pro Forma 1.28 0.25 0.71
Diluted Earnings Per Share
As Reported $ 1.26 0.26 0.73
Pro Forma 1.20 0.24 0.68
</TABLE>
The fair value of each option granted after September 30, 1995 was estimated
using the Black-Scholes option-pricing model. The following weighted average
assumptions were used for grants issued for the year ended December 31, 1997,
the three months ended December 31, 1996, and the year ended September 30, 1996,
respectively: risk free interest rates of 6.4%, 6.4%, and 5.9%; annual
volatility factors for the Company's stock of 29.5%, 28.3%, and 33.6%; dividend
yield for the year ended December 31, 1997 of 2.0%; and an average expected life
of seven years. The effects of applying SFAS No. 123 for disclosing compensation
cost under such statement, may not be representative of the effects on reported
net income for future years.
66
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
A summary of the status of the stock options as of December 31, 1997, December
31, 1996, September 30, 1996, and September 30, 1995 and changes during these
periods is presented below:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, 1997 December 31, 1996
-----------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding beginning of period 402,464 $ 8.93 342,464 $ 7.76
Acquired through merger 608,871 9.09 - -
Granted 62,430 18.94 60,750 15.58
Exercised (56,965) 6.20 - -
Forfeited (14,055) 12.46 (750) 14.13
- ---------------------------------------------------------------------------------------------
Outstanding at end of period 1,002,745 9.75 402,464 8.93
- ---------------------------------------------------------------------------------------------
Exercisable at end of period 889,816 8.87 252,331 6.42
- ---------------------------------------------------------------------------------------------
Weighted average fair value of options
granted during the period $6.82 7.15
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
September 30, 1996 September 30, 1995
---------------------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Options Price Options Price
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding beginning of year 270,803 $ 5.33 324,504 $ 5.33
Granted 97,858 14.13 - -
Exercised (22,636) 5.33 (47,846) 5.33
Forfeited (3,561) 14.13 (5,855) 5.33
- -------------------------------------------------------------------------------------------
Outstanding at end of year 342,464 7.76 270,803 5.33
- -------------------------------------------------------------------------------------------
Exercisable at end of year 221,128 5.33 209,515 5.33
- -------------------------------------------------------------------------------------------
Weighted average fair value of options
granted during the year $6.82 N/A
- -------------------------------------------------------------------------------------------
</TABLE>
In connection with the merger of Liberty Bancorp, Inc., certain options
previously granted to employees and directors of Liberty Bancorp, Inc., were
converted into options to purchase the Company's common stock. A total of
385,121 options previously granted were converted at the exchange rate to
options to purchase 405,916 shares of the Company's common stock at prices
ranging from $8.06 to $28.97 per share. Effective with the stock split effected
in the form of a stock dividend declared on August 22, 1997, the options to
purchase were converted to 608,871 at prices ranging from $5.37 to $19.31 per
share.
The following table summarizes information about the stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------
Weighted Average Weighted
----------------------------
Remaining Average
Options Life Exercise Options Exercise
Range of Exercise Prices Outstanding (Years) Price Exercisable Price
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 5.33 to 6.33 618,370 4.1 $ 5.64 618,370 $ 5.64
14.13 to 15.96 233,136 7.6 14.92 167,637 14.91
17.55 to 19.31 151,239 7.8 18.61 103,809 18.39
---------------------------------------------------------------------------
1,002,745 5.5 9.75 889,816 8.87
---------------------------------------------------------------------------
</TABLE>
67
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
17. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF
CREDIT RISK
The Company is a party to various financial instruments with off-balance sheet
risk in the normal course of its business. These instruments include commitments
to extend credit, standby letters of credit, credit enhancements, and forward
commitments to sell loans. These financial instruments carry varying degrees of
credit and interest rate risk in excess of amounts recorded in the financial
statements.
Commitments to originate and purchase mortgage loans of $57.0 million at
December 31, 1997 represent amounts which the Company plans to fund within the
normal commitment period of 60 to 90 days of which $34.3 million were fixed-rate
and $22.7 million were adjustable-rate commitments. Because the credit-
worthiness of each customer is reviewed prior to extension of the commitment,
the Company adequately controls their credit risk on these commitments, as it
does for loans recorded on the balance sheet. As part of its effort to control
interest rate risk on these commitments, the Bank may enter into forward
commitments to sell fixed-rate mortgage-backed securities to reduce exposure to
changes in loan market prices from the time of commitment until securitization.
Fixed-rate loans originated by the Bank may be securitized through FNMA to
satisfy these forward commitments. The risks associated with these contracts
arise from the possible inability of the Bank to deliver the mortgage-backed
securities on the specified delivery date. In such case, the Bank may be
required to repurchase the forward commitment to sell at the then current market
price. For the year ended December 31, 1997, the Bank securitized and sold $60.2
million of fixed-rate mortgage loans. Of these sales, $13.3 million were hedged
using forward contracts. The sales resulted in a net gain of $30,000. For the
year ended September 30, 1996, the Bank securitized and sold $36.5 million of
fixed-rate mortgage loans. Of these sales, $26.2 million were hedged using
forward contracts. The sales resulted in a net gain of $268,000. There was $1.0
million outstanding forward commitments to sell FNMA mortgage-backed securities
at December 31, 1997.
As a result of the merger, the Bank assumed two credit enhancement agreements
with local municipalities to guarantee the repayment of an aggregate of $4.0
million on municipal revenue bonds (the "Bonds"), which are secured by first
mortgages on apartment building projects. To secure the guarantees of the Bonds,
the Bank has pledged mortgage-backed securities issued by the Government
National Mortgage Association ("GNMA"). The Bank's obligations on these Bonds
expire in the year 1998 or the dates the Bonds are repaid, if earlier. In the
event of default on the Bonds, the Bank's maximum liability would be its pro
rata amount of the credit guaranty and if the Bank does not act to meet its
agreed upon obligations, the collateral pledged as security for the Bank's
guarantee may be liquidated and the proceeds used to repay the defaulted Bonds.
The Bank's position in such case would be secured by a first mortgage lien on
the underlying apartment properties and a lien against all income derived
therefrom. At December 31, 1997, there remains one credit enhancement agreement
outstanding in the amount of $2.0 million. The Bank's obligation on this Bond
expires in the year 1998 or the date the Bond is repaid, if earlier.
Additionally, the Bank has approved, but unused, home equity lines of credit,
of $79.5 million at December 31, 1997. Approval of home equity lines is based on
underwriting standards that do not allow total borrowings, including the equity
line of credit, to exceed 90% of the current appraised value of the customer's
home. This approval is similar to guidelines used when the Bank originates first
mortgage loans, and are a means of controlling its credit risk on the loan.
The Company conducts substantially all of its lending activities in the local
communities in which it serves.
18. ACQUISITION OF LIBERTY BANCORP, INC.
On February 10, 1997, Hinsdale Financial Corporation, the holding company for
Hinsdale Federal Bank for Savings, and Liberty Bancorp, Inc., the holding
company for Liberty Federal Savings Bank, consummated their merger in a stock-
for-stock exchange. The resulting organization was renamed Alliance Bancorp.
Liberty Federal Savings Bank was merged into Hinsdale Federal Bank for Savings,
and the resulting Bank operates under the name Liberty Federal Bank.
68
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The transaction was accounted for under the purchase method of accounting and
1.054 shares of Hinsdale Financial Corporation common stock were exchanged for
each share of Liberty Bancorp outstanding common stock. There were 3,930,405
shares of common stock of Hinsdale Financial Corporation issued for 3,733,013
shares of Liberty Bancorp common stock. Liberty Bancorp had total assets of $680
million and deposits of $516 million at the date of the merger. The fair value
of the net assets acquired approximated the purchase price, accordingly; no
goodwill was recorded. Earnings for the year ended December 31, 1997 includes
the earnings of Liberty Bancorp from the date of merger.
The following unaudited pro forma financial information presents the combined
results of operations of Hinsdale Financial Corporation and Liberty Bancorp,
Inc. as if the acquisition had occurred as of the beginning of each period. The
pro forma financial information does not necessarily reflect the results of
operations that would have occurred had the companies constituted a single
entity during such periods.
<TABLE>
<CAPTION>
For The Year Ended For The Year Ended
(In thousands, except per share amounts) December 31, 1997 September 30, 1996
- -------------------------------------------------------------------------------------
<S> <C> <C>
Net interest income $ 37,944 34,569
Net income 10,271 5,289
Basic earnings per share $ 1.36 0.64
Diluted earnings per share $ 1.27 0.63
</TABLE>
19. PROPOSED MERGER
On December 16, 1997, the Company entered into an Agreement and Plan of Merger
(the "Agreement") with Southwest Bancshares, Inc. ("Southwest"), which provides,
among other things, that (i) Southwest will be merged (the "Merger") with and
into Alliance Bancorp, with Alliance Bancorp as the surviving corporation, (ii)
Southwest Federal Savings and Loan Association of Chicago, the savings
association subsidiary of Southwest ("Southwest Federal"), will be merged with
and into Liberty Federal Bank, the savings bank subsidiary of Alliance Bancorp
("Liberty Federal") with Liberty Federal as the surviving institution, (iii)
each outstanding share of Southwest common stock issued and outstanding at the
effective time of the Merger will be converted into shares of common stock of
Alliance Bancorp in accordance with an "Exchange Ratio," as described below, and
(iv) each share of Alliance Bancorp's common stock issued and outstanding
immediately prior to the effective time of the Merger will remain an outstanding
share of common stock of Alliance Bancorp. The directors of Alliance Bancorp and
Southwest have entered into agreements to vote shares owned by them in favor of
the Agreement.
Under the Agreement, and subject to certain qualifications, the Exchange Ratio
will be as follows: (i) if the Alliance Bancorp Market Value (as defined in the
agreement) is less than or equal to $30.475 and greater than or equal to
$22.525, then 1.1981 shares of Alliance Bancorp Common Stock; (ii) if the
Alliance Bancorp Market Value is greater than $30.475 and less than or equal to
$35.00, then that number of shares of Alliance Bancorp Common Stock, determined
by dividing $36.5125 by the Alliance Bancorp Market Value; (iii) if the Alliance
Bancorp Market Value is greater than $35.00, then 1.0432 shares of Alliance
Bancorp Common Stock; and (iv) if the Alliance Bancorp Market Value is less than
$22.525, then that number of shares of Alliance Bancorp Common Stock, determined
by dividing $26.9875 by the Alliance Bancorp Market Value. Alliance Bancorp has
the right to terminate the Agreement if the Alliance Bancorp Market Value is
less than $19.875, unless Southwest provides notice pursuant to the Agreement
that it wants to proceed with the Merger, in which event the Exchange Ratio will
be 1.3579. Southwest Bancshares, Inc. has approximately $375 million in assets,
$275 million in deposits, and $43 million in stockholders' equity.
Consummation of the Merger is subject to certain conditions, including the
approval of stockholders of each of Alliance Bancorp and of Southwest, and the
receipt of all required regulatory approvals. The Merger is to be accounted for
using the pooling-of-interests method. It is expected that the Merger will be
completed prior to June 30, 1998.
69
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
20. CONDENSED PARENT COMPANY ONLY FINANCIAL STATEMENTS
The following condensed statements of financial condition at December 31, 1997
and September 30, 1996 and condensed statements of income and cash flows for the
years ended December 31, 1997, September 30, 1996 and 1995 and the three months
ended December 31, 1996 for Alliance Bancorp should be read in conjunction with
the consolidated financial statements and the notes thereto.
CONDENSED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
December 31, September 30,
(In thousands, except share data) 1997 1996
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets:
Cash and due from banks $ 3,395 2,182
Investment securities available for sale, at fair value 1,707 -
Loan to Bank 6,450 -
ESOP Loan to Bank - 471
Loan to Liberty Lincoln Service Corporation II 2,250 -
Equity in net assets of subsidiaries 119,971 52,650
Other assets 88 274
- ----------------------------------------------------------------------------------------------------
Total assets $ 133,861 55,577
====================================================================================================
Liabilities and Stockholders' Equity
Liabilities:
Accrued expenses and other liabilities $ 2,923 106
- ----------------------------------------------------------------------------------------------------
Total liabilities 2,923 106
- ----------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $.01 par value; authorized 1,500,000 shares;
none outstanding - -
Common stock, $.01 par value; authorized 11,000,000 shares at
December 31, 1997 and 6,000,000 shares at September 30, 1996;
8,176,234 shares issued at December 31, 1997;
4,185,128 shares issued at September 30, 1996 82 27
Additional paid-in capital 86,553 21,066
Retained earnings, substantially restricted 44,167 36,038
Treasury stock, at cost; 154,087 shares at December 31, 1997 and
142,500 at September 30, 1996 (1,502) (1,284)
Common stock purchased by Employee Stock Ownership Plan - (471)
Net unrealized gains on securities available for sale, net of tax 1,638 95
- ----------------------------------------------------------------------------------------------------
Total stockholders' equity 130,938 55,471
- ----------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 133,861 55,577
====================================================================================================
</TABLE>
(continued)
70
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Condensed Parent Company Only Financial Statements
(continued)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION> For The
For The Three
Year Months
Ended Ended For The Year Ended
Dec. 31, Dec. 31, September 30,
-------------------
(In thousands) 1997 1996 1996 1995
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity in earnings of subsidiaries $ 10,362 1,123 3,303 4,752
Interest income 596 10 4 24
- ----------------------------------------------------------------------------------
Total income 10,958 1,133 3,307 4,776
Noninterest expense 781 82 379 504
- ----------------------------------------------------------------------------------
Income before income tax benefit 10,177 1,051 2,928 4,272
Income tax benefit (72) (28) (146) (187)
- ----------------------------------------------------------------------------------
Net income $ 10,249 1,079 3,074 4,459
==================================================================================
</TABLE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For The
For The Three
Year Months
Ended Ended For The Year Ended
Dec. 31, Dec. 31, September 30,
--------------------
(In thousands) 1997 1996 1996 1995
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities:
Net income $ 10,249 1,079 3,074 4,459
Equity in earnings of subsidiaries (10,362) (1,123) (3,303) (4,752)
Dividend received from Bank 1,600 - - 2,000
(Increase) decrease in other assets 685 (492) (181) (93)
Increase (decrease) in accrued expenses
and other liabilities (21) 146 - 105
Interest reinvested on investment securities - - - (24)
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 2,151 (390) (410) 1,695
- -------------------------------------------------------------------------------------------------
Investing activities:
Net assets acquired/sold, net of cash acquired 173 - 2,705 (2,631)
ESOP loan to Bank - - (514) -
Principal payment of ESOP loan 984 43 43 -
Reduction of loan to Bank 1,000 - - -
Reduction of loan to LLSCII 578 - - -
Investment in LLSCII (1,000) - - -
Purchase of investment securities available for sale (1,248) - - -
Proceeds from the maturities of investment securities 1,000 - - 817
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 1,487 43 2,234 (1,814)
- -------------------------------------------------------------------------------------------------
Financing activities:
Proceeds from options exercised 355 - 121 255
Purchase of treasury stock (143) - - -
Cash dividends paid (2,285) - - -
Cash paid in lieu of fractional shares related
to stock split (5) - (2) -
- -------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (2,078) - 119 255
- -------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,560 (347) 1,943 136
Cash and cash equivalents at beginning of period 1,835 2,182 239 103
- -------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 3,395 1,835 2,182 239
=================================================================================================
</TABLE>
71
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
21. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 "Disclosures about Fair
Value of Financial Instruments" ("SFAS No. 107") requires the disclosure of
estimated fair values of all asset, liability and off-balance sheet financial
instruments. The estimated fair value amounts under SFAS No. 107 have been
determined as of a specific point in time utilizing various available market
information, assumptions and appropriate valuation methodologies. Accordingly,
the estimated fair values presented herein are not necessarily representative of
the underlying value of the Company. Rather, the disclosures are limited to
reasonable estimates of the fair value of only the Company's financial
instruments. The use of assumptions and various valuation techniques, as well as
the absence of secondary markets for certain financial instruments, will likely
reduce the comparability of fair value disclosures between financial
institutions. The Company does not plan to sell most of its assets or settle
most of its liabilities at these fair values. The estimated fair values of the
Company's financial instruments as of December 31, 1997 and September 30, 1996
are set forth in the following table and explanation.
<TABLE>
<CAPTION>
December 31, 1997 September 30, 1996
(In thousands) Carrying Amount Fair Value Carrying Amount Fair Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $ 10,839 10,839 6,069 6,069
Interest-bearing deposits 33,784 33,784 22,924 22,924
Investment securities 91,475 91,475 1,998 1,998
Mortgage-backed securities 213,957 213,957 5,367 5,367
Loans 957,897 973,176 590,722 587,105
Accrued interest receivable 8,353 8,353 3,431 3,431
Stock in FHLB of Chicago 12,855 12,855 7,445 7,445
- ---------------------------------------------------------------------------------------------------------------
Total financial assets $ 1,329,160 1,344,439 637,956 634,339
===============================================================================================================
Financial Liabilities:
Non-maturing deposits 294,036 294,036 187,771 187,771
Deposits with stated maturities 728,578 729,835 264,701 265,359
Borrowed funds 173,531 173,199 128,949 129,040
Collateralized mortgage obligations 1,065 1,065 2,542 2,546
Accrued interest payable 1,494 1,494 1,027 1,027
- ---------------------------------------------------------------------------------------------------------------
Total financial liabilities $ 1,198,704 1,199,629 584,990 585,743
===============================================================================================================
</TABLE>
The following methods and assumptions are used by the Company in estimating
the fair value amounts for its financial instruments.
Cash, due from banks and interest-bearing deposits. The carrying value of
cash, due from banks and interest-bearing deposits approximates fair value due
to the short period of time between origination of the instrument and their
expected realization.
Investment securities and mortgage-backed securities. The fair value of these
financial instruments was estimated using quoted market prices. The fair value
of FHLB stock is based on its redemption value.
Loans receivable. The fair value of loans receivable held for investment is
based on values obtained in the secondary market. The values obtained in the
secondary market assumed the loans were securitized into pools of loans with
similar characteristics; such as interest rate floors, ceilings and time to next
rate adjustment. Loans in which the secondary market does not exist, the fair
value was estimated based on the credit quality and contractual cash flows
discounted using the current rates.
The fair value of loans held for sale is based on the committed purchase price
to be paid by correspondent lenders.
72
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Accrued interest receivable and payable. The carrying value of accrued
interest receivable and payable approximates fair value due to the relatively
short period of time between accrual and expected realization.
Deposits. The fair value of deposits with no stated maturity, such as demand
deposits, regular savings, NOW and money market accounts are disclosed as the
amount payable on demand.
The fair value of fixed-maturity deposits is the present value of the
contractual cash flow discounted using interest rates currently being offered
for deposits with similar remaining terms to maturity.
Borrowed funds and collateralized mortgage obligations. The fair value of FHLB
advances is the present value of the contractual cash flows, discounted by the
current rate offered for similar remaining maturities.
The fair value of collateralized mortgage obligations is estimated based on
contractual cash flows adjusted for prepayment assumptions, discounted using the
current market rate at which similar bonds would yield with similar collateral
and average life.
Commitments to extend credit. The fair value of commitments to extend credit
is estimated as the amount that the Company would receive or pay to execute a
new commitment with terms identical to current commitments considering current
interest rates.
73
<PAGE>
ALLIANCE BANCORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
22. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following are the consolidated results of operations on a quarterly basis:
<TABLE>
<CAPTION>
Quarter
Ended
Dec. 31, December 31, 1997
---------------------------------------------------
(In thousands, except per share amounts) 1996 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income $ 11,098 18,861 23,329 26,507 23,931
Total interest expense 6,824 11,341 14,439 15,514 14,823
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income 4,274 7,520 8,890 10,993 9,108
Provision for loan losses - - - - -
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,274 7,520 8,890 10,993 9,108
- ------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Gain (loss) on sales of mortgage-backed securities
and loans receivable 70 (396) 82 76 85
Other noninterest income 3,086 3,093 4,128 4,431 3,965
- ------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 3,156 2,697 4,210 4,507 4,050
Noninterest expense 5,666 7,889 8,802 10,047 8,514
- ------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 1,764 2,328 4,298 5,453 4,644
Income tax expense 685 899 1,662 2,113 1,800
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 1,079 1,429 2,636 3,340 2,844
==============================================================================================================================
Basic earnings per share (1) $ 0.27 0.23 0.33 0.42 0.35
Diluted earnings per share (1) $ 0.26 0.21 0.31 0.39 0.33
==============================================================================================================================
<CAPTION>
September 30, 1996
---------------------------------------------------
(In thousands, except per share amounts) 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Total interest income $ 11,783 11,496 11,302 11,120
Total interest expense 7,714 7,312 7,056 6,885
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income 4,069 4,184 4,246 4,235
Provision for loan losses 50 - - -
- ------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,019 4,184 4,246 4,235
- ------------------------------------------------------------------------------------------------------------------------------
Noninterest income:
Gain (loss) on sales of investment securities, mortgage-backed
securities, loans receivable and real estate 98 210 (8) 213
Other noninterest income 2,880 3,361 3,028 3,165
- ------------------------------------------------------------------------------------------------------------------------------
Total noninterest income 2,978 3,571 3,020 3,378
Noninterest expense 5,296 5,792 5,859 8,749
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,701 1,963 1,407 (1,136)
Income tax expense (benefit) 679 762 275 (855)
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,022 1,201 1,132 (281)
==============================================================================================================================
Basic earnings (loss) per share (1) $ 0.25 0.30 0.28 (0.07)
Diluted earnings (loss) per share (1) $ 0.24 0.29 0.27 (0.07)
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The 1996 and first three quarters of 1997 earnings per share amounts have
been restated to comply with SFAS No. 128, "Earnings per Share."
74
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Alliance Bancorp:
We have audited the accompanying consolidated statements of financial
condition of Alliance Bancorp and subsidiaries ("the Company") as of December
31, 1997 and September 30, 1996, and the related consolidated statements of
income, changes in stockholders' equity, and cash flows for the year ended
December 31, 1997, each of the years in the two year period ended September 30,
1996, and for the three months ended December 31, 1996. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Alliance
Bancorp and subsidiaries as of December 31, 1997 and September 30, 1996, and the
results of their operations, changes in stockholders' equity, and their cash
flows for the year ended December 31, 1997, each of the years in the two year
period ended September 30, 1996, and the three months ended December 31, 1996 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
January 23, 1998
75
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information relating to Directors and Executive Officers is incorporated
herein by reference to the Registrant's Proxy Statement for the Annual Meeting
of Stockholders to be held in 1998.
ITEM 11. EXECUTIVE COMPENSATION.
The information relating to executive compensation is incorporated herein by
reference to the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held in 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information relating to security ownership of certain beneficial owners
and management is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held in 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information relating to certain relationships and related transactions is
incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held in 1998.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Financial Statements
The following consolidated financial statements of the registrant and
its subsidiaries are filed as a part of this document under Item 8.
Financial Statements and Supplementary Data.
Consolidated Statements of Financial Condition as of December 31, 1997
and September 30, 1996
Consolidated Statements of Income for the Years Ended December 31,
1997, September 30, 1996 and 1995, and the three months ended
December 31, 1996
Consolidated Statements of Changes in Stockholders' Equity for the
Years Ended December 31, 1997, September 30, 1996 and 1995, and the
three months ended December 31, 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997 and September 30, 1996 and 1995, and the three months ended
December 31, 1996
Notes to Consolidated Financial Statements
Independent Auditors' Report
(a)(2) Financial Statement Schedules
All schedules are omitted because they are not required or applicable
or the required information is shown in the consolidated financial
statements or the notes thereto.
76
<PAGE>
(a)(3) Exhibits
The following exhibits are either filed as part of this report or are
incorporated herein by reference.
Exhibit No. 3. Certificate of Incorporation and Bylaws.
(i) Restated Certificate of Incorporation of Alliance Bancorp
(ii) Bylaws of Alliance Bancorp*
Exhibit No. 10. Material Contracts.
(i) Employment Agreement between the Bank and Mr. Bristol *
(ii) Employment Agreements between Fredric G. Novy and Liberty
Bancorp, Inc. and Liberty Federal Savings Bank and assumed by
the Company and its subsidiary
(iii) Employment Agreement between the Company and Howard A. Davis+
(iv) Form of Change in Control Agreements entered into between the
Company and its senior officers
(v) Bank Recognition and Retention Plans and Trust **
(vi) Incentive Stock Option Plan **
(vii) Stock Option Plan for Outside Directors **
(viii) 1994 Incentive Stock Option Plan ***
(ix) 1997 Long-Term Incentive Stock Benefit Plan****
* Incorporated by reference into this document from the exhibits to Form S-1,
Registration Statement, filed on March 31, 1992, Registration No. 33-46877.
** Incorporated by reference into this document from the attachments to the
Proxy Statement dated December 27, 1993 for the Annual Meeting of
Stockholders held on February 9, 1994.
*** Incorporated by reference into this document from the attachments to the
Proxy Statement dated December 26, 1994 for the Annual Meeting of
Stockholders held on February 8, 1995.
**** Incorporated by reference into this document from the attachments to the
Proxy Statement dated May 1, 1997 for the Annual Meeting of Stockholders
held on May 28, 1997.
+ Incorporated herein by reference into this document to Exhibit No. 10 to
the Registrant's 1995 Form 10-K.
77
<PAGE>
Exhibit No. 21. Subsidiaries of the Registrant.
Subsidiary information is incorporated herein by reference to "Part I -
Subsidiaries"
Exhibit No. 23. Consent of KPMG Peat Marwick LLP
Consent of KPMG Peat Marwick LLP to the incorporation by reference into
the registrant's registration statement on Form S-8 of their report
accompanying the financial statements of the registrant for the year
ended December 31, 1997.
(b) Reports on Form 8-K.
A report on Form 8-K was filed by the Company on December 29, 1997 for
the purposes of reporting, pursuant to Items 5 and 7 of the Form 8-K,
that the Company entered into an Agreement and Plan of Merger with
Southwest Bancshares, Inc. as of December 16, 1997.
78
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ALLIANCE BANCORP
------------------------------------------
(Registrant)
By: /s/ Kenne P. Bristol
------------------------------
Kenne P. Bristol
DATED: March 13, 1998 President, Chief Executive
--------------
Officer and Director
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Name Title Date
<S> <C> <C>
/s/ Kenne P. Bristol President, Chief Executive Officer March 13, 1998
- ------------------------------ and Director ----------------
Kenne P. Bristol
/s/ Fredric G. Novy Chairman of the Board of March 13, 1998
- ------------------------------ Directors ----------------
Fredric G. Novy
/s/ Richard A. Hojnicki Executive Vice President March 13, 1998
- ------------------------------ Chief Financial Officer and ----------------
Richard A. Hojnicki Corporate Secretary
(Principal Financial Officer)
/s/ Ilene M. Bock Senior Vice President and Controller March 13, 1998
- ------------------------------ (Principal Accounting Officer) ----------------
Ilene M. Bock
/s/ Edward J. Burns Director March 13, 1998
- ------------------------------ ----------------
Edward J. Burns
/s/ Howard A. Davis Director March 13, 1998
- ------------------------------ ----------------
Howard A. Davis
/s/ Whit G. Hughes Director March 13, 1998
- ------------------------------ ----------------
Whit G. Hughes
/s/ Howard R. Jones Director March 13, 1998
- ------------------------------ ----------------
Howard R. Jones
/s/ H. Verne Loeppert Director March 13, 1998
- ------------------------------ ----------------
H. Verne Loeppert
/s/ David D. Mill Director March 13, 1998
- ------------------------------ ----------------
David D. Mill
/s/ Edward J. Nusrala Director March 13, 1998
- ------------------------------ ----------------
Edward J. Nusrala
/s/William C. O'Donnell Director March 13, 1998
- ------------------------------ ----------------
William C. O'Donnell
/s/ William R. Rybak Director March 13, 1998
- ------------------------------ ----------------
William R. Rybak
/s/ Russell F. Stephens, Jr. Director March 13, 1998
- ------------------------------ ----------------
Russell F. Stephens, Jr.
/s/ Donald E. Sveen Director March 13, 1998
- ------------------------------ ----------------
Donald E. Sveen
/s/ Vernon B. Thomas, Jr. Director March 13, 1998
- ------------------------------ ----------------
Vernon B. Thomas, Jr.
</TABLE>
79
<PAGE>
Exhibit 3(i)
RESTATED CERTIFICATE OF INCORPORATION
OF
ALLIANCE BANCORP
(FORMERLY HINSDALE FINANCIAL CORPORATION)
FIRST: The name of the Corporation is Alliance Bancorp (hereinafter
-----
sometimes referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in the
------
State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City
of Wilmington, County of New Castle. The name of the registered agent at that
address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
-----
activity for which a corporation may be organized under the General Corporation
Law of Delaware.
FOURTH: A. The total number of shares of all classes of stock which the
-------
Corporation shall have authority to issue is twelve million five hundred
thousand (12,500,000) consisting of :
1. one million five hundred thousand (1,500,000) shares of
Preferred Stock, par value one cent ($. 01) per Share (the "Preferred Stock");
and
2. eleven million (11,000,000) shares of Common Stock, par
value one cent ($.01) per share (the "Common Stock").
B. The Board of Directors is authorized, subject to any
limitations prescribed by law, to provide for the issuance of the shares of
Preferred Stock in series, and by filing a certificate pursuant to the
applicable law of the State of Delaware (such certificate being hereinafter
referred to as a "Preferred Stock Designation"), to establish from time to time
the number of shares to be included in each such series, and to fix the
designation, powers,
<PAGE>
preferences, and rights of the shares of each such series and any
qualifications, limitations or restrictions thereof. The number of authorized
shares of Preferred Stock may be increased or decreased, but not below the
number of shares thereof then outstanding, by the affirmative vote of the
holders of a majority of the Common Stock, without a vote of the holders of the
Preferred Stock, or of any series thereof, unless a vote of any such holders is
required pursuant to the terms of any Preferred Stock Designation.
C. 1. Notwithstanding any other provision of this Certificate
of Incorporation, in no event shall any record owner of any outstanding Common
Stock which is beneficially owned, directly or indirectly, by a person who, as
of any record date for the determination of stockholders entitled to vote on any
matter, beneficially owns in excess of 10% of the then-outstanding shares of
Common Stock (the "Limit"), be entitled to, or permitted any vote in respect of
the shares held in excess of the Limit. The number of votes which may be cast by
any record owner by virtue of the provisions hereof in respect of Common Stock
beneficially owned by such person owning shares in excess of the Limit shall be
a number equal to the total number of votes which a single record owner of all
Common Stock owned by such person would be entitled to cast, multiplied by a
fraction, the numerator of which is the number of shares of such class or series
which are both beneficially owned by such person and owned of record by such
record owner and the denominator of which is the total number of shares of
Common Stock beneficially owned by such person owning shares in excess of the
Limit.
2. The following definitions shall apply to this Section C
of this Article FOURTH:
(a) "Affiliate" shall have the meaning ascribed to it
in Rule 12b-2 of the General Rules and Regulations under the Securities Act of
1934, as in effect on the date of filing of this Certificate of Incorporation.
2
<PAGE>
(b) "Beneficial ownership" shall be determined
pursuant to Rule 13d-3 of the General Rules and Regulations under the Securities
Exchange Act of 1934 (or any successor rule of statutory provision), or, if said
Rule 13d-3 shall be rescinded and there shall be no successor rule or provision
thereto, pursuant to said Rule 13d-3 as in effect on the date of filing of this
Certificate of Incorporation; provided, however, that a person shall, in any
event, also be deemed the beneficial owner. of any Common Stock:
(1) which such person or any of its affiliates beneficially
owns, directly or indirectly; or
(2) which such person or any of its affiliates has (i) the
right to acquire (whether such right is exercisable immediately or
only after the passage of time), pursuant to any agreement,
arrangement or understanding (but shall not be deemed to be the
beneficial owner of any voting shares solely by reason of an
agreement, contract, or other arrangement with this Corporation to
effect any transaction which is described in any one or more of
clauses 1 through 5 of Section A of Article EIGHTH) or upon the
exercise of conversion rights, exchange rights, warrants, or options
or otherwise, or (ii) sole or shared voting or investment power with
respect thereto pursuant to any agreement, arrangement, understanding,
relationship or otherwise (but shall not be deemed to be the
beneficial owner of any voting shares solely by reason of a revocable
proxy granted for a particular meeting of stockholders, pursuant to a
public solicitation of proxies for such meeting, with respect to
shares of which neither such person nor any such affiliate is
otherwise deemed the beneficial owner); or
(3) which are beneficially owned, directly or indirectly,
by any other person with which such first mentioned person or any of
its affiliates acts as a partnership, limited partnership, syndicate
or other group pursuant to any agreement, arrangement or understanding
for the purpose of acquiring, holding, voting or disposing of any
shares of capital stock of this Corporation;
3
<PAGE>
and provided further, however, that (1) no Director or Officer of this
Corporation (or any affiliate of any such Director or Officer) shall, solely by
reason of any or all of such Directors or Officers acting in their capacities as
such, be deemed, for any purposes hereof, to beneficially own any Common Stock
beneficially owned by any other such Director or Officer (or any affiliate
thereof), and (2) neither any employee stock ownership or similar plan of this
Corporation or any subsidiary of this Corporation, nor any trustee with respect
thereto or any affiliate of such trustee (solely by reason of such capacity of
such trustee), shall be deemed, for any purposes hereof, to beneficially own any
Common Stock held under any such plan. For purposes of computing the percentage
beneficial ownership of Common Stock of a person, the outstanding Common Stock
shall include shares deemed owned by such person through application of this
subsection but shall not include any other Common Stock which may be issuable by
this Corporation pursuant to any agreement, or upon exercise of conversion
rights, warrants or options, or otherwise. For all other purposes, the
outstanding Common Stock shall include only Common Stock then outstanding and
shall not include any Common Stock which may be issuable by this Corporation
pursuant to any agreement, or upon the exercise of conversion rights, warrants
or options, or otherwise.
(c) A "person" shall mean any individual, firm,
corporation, or other entity.
3. The Board of Directors shall have the power to construe
and apply the provisions of this section and to make all determinations
necessary or desirable to implement such provisions, including but not limited
to matters with respect to (i) the number of shares of Common Stock beneficially
owned by any person, (ii) whether a person is an affiliate of another, (iii)
whether a person has an agreement, arrangement, or understanding with another as
to the matters referred to in the definition of beneficial ownership, (iv) the
application of any other definition or operative provision of the section to the
given facts, or (v) any other matter relating to the applicability or effect of
this section.
4
<PAGE>
4. The Board of Directors shall have the right to demand
that any person who is reasonably believed to beneficially own Common Stock in
excess of the limit (or holds of record Common Stock beneficially owned by any
person in excess of the Limit) supply the Corporation with complete information
as to (i) the record owner(s) of all shares beneficially owned by such person
who is reasonably believed to own shares in excess of the Limit, (ii) any other
factual matter relating to the applicability or effect of this section as may
reasonably be requested of such person.
5. Except as otherwise provided by law or expressly
provided in this Section C, the presence, in person or by proxy, of the holders
of record of shares of capital stock of the Corporation entitling the holders
thereof to cast a majority of the votes (after giving effect, if required, to
the provisions of this section) entitled to be cast by the holders of shares of
capital stock of the Corporation entitled to vote shall constitute a quorum at
all meetings of the stockholders, and every reference in this Certificate of
Incorporation to a majority or other proportion of capital stock (or the holders
thereof) for purposes of determining any quorum requirement or any requirement
for stockholder consent or approval shall be deemed to refer to such majority or
other proportion of the votes (or the holders thereof) then entitled to be cast
in respect of such capital stock.
6. Any constructions, applications, or determinations made
by the Board of Directors, pursuant to this section in good faith and on the
basis of such information and assistance as was then reasonably available for
such purpose shall be conclusive and binding upon the Corporation and its
stockholders.
7. In the event any provision (or portion thereof) of this
Section C shall be found to be invalid, prohibited or unenforceable for any
reason, the remaining provisions (or portions thereof) of this Section shall
remain in full force and effect, and shall be construed as if such invalid,
prohibited or unenforceable provision had been stricken here from or otherwise
rendered inapplicable, it being the intent of this Corporation and its
stockholders
5
<PAGE>
that each such remaining provision (or portion thereof ) of this Section C
remain, to the fullest extent permitted by law, applicable and enforceable as to
all stockholders, including stockholders owning an amount of stock over the
Limit, notwithstanding any such finding.
FIFTH: The following provisions are inserted for the management of the
-----
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its Directors and stockholders:
A. The business and affairs of the Corporation stall be managed
by or under the direction of the Board of Directors, In addition to the powers
and authority expressly conferred upon them by statute or by this Certificate of
Incorporation or the By-laws of the Corporation, the Directors are hereby
empowered to exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation.
B. The Directors of the Corporation need not be elected by
written ballot unless the By-laws so provide.
C. Any action required or permitted to be taken by the
stockholders of the corporation must be effected at a duly called annual or
special meeting of stockholders of the Corporation and may not be effected by
any consent in writing by such stockholders.
D. Special meetings of stockholders of the Corporation may be
called only by the Board of Directors pursuant to a resolution adopted by a
majority of the total number of authorized directorships (whether or not there
exist any vacancies in previously authorized directorships at the time any such
resolution is presented to the Board for adoption) (the "Whole Board") or as
otherwise provided in the By-laws.
SIXTH: A. The number of Directors shall be fixed from time to time
-----
exclusively by the Board of Directors pursuant to a resolution adopted by a
majority of the
6
<PAGE>
Whole Board. The Directors shall be divided into three classes, with the term of
office of the first class to expire at the first annual meeting of stockholders,
the term of office of the second class to expire at the annual meeting of
stockholders one year thereafter and the term of office of the third class to
expire at the annual meeting of stockholders two years thereafter. At each
annual meeting of stockholders following such initial classification and
election, Directors elected to succeed those Directors whose terms expire shall
be elected for a term of office to expire at the third succeeding annual meeting
of stockholders after their election, with each director to hold office until
his or her successor shall have been duly elected and qualified.
B. Subject to the rights of the holders of any series of
Preferred Stock then outstanding, newly created directorships resulting from any
increase in the authorized number of Directors or any vacancies in the Board of
Directors resulting from death, resignation, retirement, disqualification,
removal from office or other cause may be filled only by a majority vote of the
Directors then in office, though less than a quorum, and Directors so chosen
shall hold office for a term expiring at the annual meeting of stockholders at
which the term of office of the class to which they have been chosen expires. No
decrease in the number of Directors constituting the Board of Directors shall
shorten the term of any incumbent Director.
C. Advance notice of stockholder nominations for the election
of Directors and of business to be brought by stockholders before any meeting of
the stockholders of the Corporation shall be given in the manner provided in the
By-laws of the Corporation.
D. Subject to the rights of the holders of any series of
Preferred Stock then outstanding, any Directors, or the entire Board of
Directors, may be removed from office at any time, but only for cause and only
by the affirmative vote of the holders of at least 80 percent of the voting
power of all of the then-outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of Directors (after giving effect to
the provisions of Article FOURTH of this Certificate of Incorporation ("Article
FOURTH")), voting together as a single class.
7
<PAGE>
SEVENTH: The Board of Directors is expressly empowered to adopt, amend or
--------
repeal By-laws of the Corporation. Any adoption, amendment or repeal of the By-
laws of the Corporation by the Board of Directors shall require the approval of
a majority of the Whole Board. The stockholders shall also have power to adopt,
amend or repeal the By-laws of the Corporation; provided, however, that,
addition to any vote of the holders of any class or series of stock of this
Corporation required by law or by this Certificate of Incorporation, the
affirmative vote of the holders of at least 80 percent of the voting power of
all of the then-outstanding shares of the capital stock of the Corporation
entitled to vote generally in the election of Directors (after giving effect to
the provisions of Article FOURTH), voting together as a single class, shall be
required to adopt, amend or repeal any provisions of the By-laws of the
Corporation.
EIGHTH: A. In addition to any affirmative vote required by law or this
-------
Certificate of Incorporation, and except as otherwise expressly provided in this
Section:
1. any merger or consolidation of the Corporation or any
Subsidiary (as hereinafter defined) with (i) any Interested Stockholder (as
hereinafter defined) or (ii) any other corporation (whether or not itself an
Interested Stockholder) which is, or after such merger or consolidation would
be, an Affiliate (as hereinafter defined) of an Interested Stockholder; or
2. any sale, lease, exchange, mortgage, pledge, transfer
or other disposition (in one transaction or a series of transactions) to or with
any Interested Stockholder, or any Affiliate of any Interested Stockholder, of
any assets of the Corporation or any Subsidiary having an aggregate Fair Market
Value (as hereinafter defined) equaling or exceeding 25% or more of the combined
assets of the Corporation and its Subsidiaries; or
3. the issuance or transfer by the Corporation or any
Subsidiary (in one transaction or a series of transactions) of any securities of
the Corporation or
8
<PAGE>
any Subsidiary to any Interested Stockholder or any Affiliate of any Interested
Stockholder in exchange for cash, securities or other property (or a combination
thereof) having an aggregate Fair Market Value (as hereinafter defined) equaling
or exceeding 25% of the combined Fair Market Value of the outstanding common
stock of the Corporation and its Subsidiaries, except for any issuance or
transfer pursuant to an employee benefit plan of the Corporation or any
Subsidiary thereof; or
4. the adoption of any plan or proposal for the
liquidation or dissolution of the Corporation proposed by or on behalf of an
Interested Stockholder or any Affiliate of any Interested Stockholder; or
5. any reclassification of securities (including any
reverse stock split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or any other
transaction (whether or not with or into or otherwise involving an Interested
Stockholder) which has the effect, directly or indirectly, of increasing the
proportionate share of the outstanding shares of any class of equity or
convertible securities of the Corporation or any Subsidiary which is directly or
indirectly owned by any Interested Stockholder or any Affiliate of any
Interested Stockholder;
shall require the affirmative vote of the holders of at least 80% of the voting
power of the then-outstanding shares of stock of the Corporation entitled to
vote in the election of Directors (the "Voting Stock") (after giving effect to
the provisions of Article FOURTH), voting together as a single class. Such
affirmative vote shall be required notwithstanding the fact that no vote may be
required, or that a lesser percentage may be specified, by law or by any other
provisions of this Certificate of Incorporation or any Preferred Stock
Designation or in any agreement with any national securities exchange or
otherwise.
The term "Business Combination" as used in this Article EIGHTH shall mean
any transaction which is referred to in any one or more of paragraphs 1 through
5 of Section A of this Article EIGHTH.
9
<PAGE>
B. The provisions of Section A of this Article EIGHTH shall not
be applicable to any particular Business Combination, and such Business
Combination shall require only the affirmative vote of the majority of the
outstanding shares of capital stock entitled to vote, or such vote as is
required by law or by this Certificate of Incorporation, if, in the case of any
Business Combination that does not involve any cash or other consideration being
received by the stockholders of the Corporation solely in their capacity as
stockholders of the Corporation, the condition specified in the following
paragraph 1 is met or, in the case of any other Business Combination, all of the
conditions specified in either of the following paragraphs 1 or 2 are met:
1. The Business Combination shall have been approved by a
majority of the Disinterested Directors (as hereinafter defined).
2. All of the following conditions shall have been met:
(a) The aggregate amount of the cash and the Fair
Market Value as of the date of the consummation of the Business Combination of
consideration other than cash to be received per share by the holders of Common
Stock in such Business Combination shall at least be equal to the higher of the
following:
(1) (if applicable) the Highest Per Share Price
(as hereinafter defined), including any brokerage commissions, transfer taxes
and soliciting dealers' fees, paid by the Interested Stockholder or any of its
Affiliates for any shares of Common Stock acquired by it (i) within the two-year
period immediately prior to the first public announcement of the proposal of the
Business Combination (the "Announcement Date"), or (ii) in the transaction in
which it became an Interested Stockholder. whichever is higher.
10
<PAGE>
(2) the Fair Market Value per share of Common
Stock on the Announcement Date or on the date on which the Interested
Stockholder became an Interested Stockholder (such latter date is referred to in
this Article EIGHTH as the "Determination Date"), whichever is higher.
(b) The aggregate amount of the cash and the Fair
Market Value as of the date of the consummation of the Business Combination of
consideration other than cash to be received per share by holders of shares of
any class of outstanding Voting Stock other than Common Stock shall be at least
equal to the highest of the following (it being intended that the requirements
of this subparagraph (b) shall be required to be met with respect to every such
class of outstanding Voting Stock, whether or not the Interested Stockholder has
previously acquired any shares of a particular class of Voting Stock);
(1) (if applicable) the Highest Per Share Price
(as hereinafter defined), including any brokerage commissions, transfer taxes
and soliciting dealers' fees, paid by the Interested Stockholder for any shares
of such class of Voting Stock acquired by it (i) within the two-year period
immediately prior to the Announcement Date, or (ii) in the transaction in which
it became an Interested Stockholder, whichever is higher;
(2) (if applicable) the highest preferential
amount per share to which the holders of shares of such class of Voting Stock
are entitled in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; and
(3) the Fair Market Value per share of such class
of Voting Stock on the Announcement Date or on the Determination Date, whichever
is higher.
(c) The consideration to be received by holders of a
particular class of outstanding Voting Stock (including Common Stock) shall be
in cash or in the
11
<PAGE>
same form as the Interested Stockholder has previously paid for shares of such
class of Voting Stock. If the Interested Stockholder has paid for shares of any
class of Voting Stock with varying forms of consideration, the form of
consideration to be received per share by holders of shares of such class of
Voting Stock shall be either cash or the form used to acquire the largest number
of shares of such class of Voting Stock previously acquired by the Interested
Stockholder. The price determined in accordance with subparagraph B.2 of this
Article EIGHTH shall be subject to appropriate adjustment in the event of any
stock dividend, stock split, combination of shares or similar event.
(d) After such Interested Stockholder has become an
Interested Stockholder and prior to the consummation of such Business
Combination: (1) except as approved by a majority of the Disinterested Directors
(as hereinafter defined), there shall have been no failure to declare and pay at
the regular date therefor any full quarterly dividends (whether or not
cumulative) on any outstanding stock having preference over the Common Stock as
to dividends or liquidation; (2) there shall have been (i) no reduction in the
annual rate of dividends paid on the Common Stock (except as necessary to
reflect any subdivision of the Common Stock), except as approved by a majority
of the Disinterested Directors, and (ii) an increase in such annual rate of
dividends as necessary to reflect any reclassification (including any reverse
stock split), recapitalization, reorganization or any similar transaction which
has the effect of reducing the number of outstanding Shares of the Common Stock,
unless the failure to so increase such annual rate is approved by a majority of
the Disinterested Directors, and (3) neither such Interested Stockholder or any
of its Affiliates shall have become the beneficial owner of any additional
shares of Voting Stock except as part of the transaction which results in such
Interested Stockholder becoming an Interested Stockholder.
(e) After such Interested Stockholder has become an
Interested Stockholder, such Interested Stockholder shall not have received the
benefit, directly or indirectly (except proportionately as a stockholder), of
any loans, advances, guarantees, pledges or other financial assistance or any
tax credits or other tax advantages provided by the
12
<PAGE>
Corporation, whether in anticipation of or in connection with such Business
Combination or otherwise.
(f) A proxy or information statement describing the
proposed Business Combination and complying with the requirements of the
Securities Exchange Act of 1934 and the rules and regulations thereunder (or any
subsequent provisions replacing such Act, rules or regulations) shall be mailed
to stockholders of the Corporation at least 30 days prior to the consummation of
such Business Combination (whether or not such proxy or information statement is
required to be mailed pursuant to such Act or subsequent provisions).
C. For the purposes of this Article EIGHTH:
1. A "Person" shall include an individual, a group acting
in concert, a corporation, a partnership, an association, a joint venture, a
pool, a joint stock company, a trust, an unincorporated organization or similar
company, a syndicate or any other group formed for the purpose of acquiring,
holding or disposing of securities.
2. "Interested Stockholder" shall mean any person (other
than the Corporation or any Holding Company or Subsidiary thereof) who or which:
(a) is The beneficial owner, directly or indirectly,
of more than 5% of the voting power of the outstanding Voting Stock; or
(b) is an Affiliate of the Corporation and at any time
within the two-year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of 5% or more of the voting power of
the then outstanding Voting Stock; or
13
<PAGE>
(c) is an assignee of or has otherwise succeeded to
any shares of voting Stock which were at any time within the two-year period
immediately prior to the date in question beneficially owned by any Interested
Stockholder, if such assignment or succession shall have occurred in the course
of a transaction or series of transactions not involving a public offering
within the meaning of the Securities Act of 1933.
3. For purposes of this Article EIGHTH, "beneficial
ownership" shall be determined in the manner provided in Section C of Article
FOURTH hereof.
4. "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as in effect on the date
of filing of this Certificate of Incorporation.
5. "Subsidiary" means any corporation of which a majority
of any class of equity security is owned, directly or indirectly, by the
Corporation; provided, however, that for the purposes of the definition of
Interested Stockholder set forth in Paragraph 2 of this Section C, the term
"Subsidiary" shall mean only a corporation of which a majority of each class of
equity security is owned, directly or indirectly, by the Corporation.
6. "Disinterested Director" means any member of the Board
of Directors who is unaffiliated with the Interested Stockholder and was a
member of the Board of Directors prior to the time that the Interested
Stockholder became an Interested Stockholder, and any Director who is thereafter
chosen to fill any vacancy of the Board of Directors or who is elected and who,
in either event, is unaffiliated with the Interested Stockholder and in
connection with his or her initial assumption of office is recommended for
appointment or election by a majority of Disinterested Directors then on the
Board of Directors.
7. "Fair Market Value" means: (a) in the case of stock,
the highest closing sales price of the stock during the 30-day period
immediately preceding the date
14
<PAGE>
in question of a share of such stock on the National Association of Securities
Dealers Automated Quotation System or any system then in use, or, if such stock
is admitted to trading on a principal United States securities exchange
registered under the Securities Exchange Act of 1934, Fair Market Value shall be
the highest sale price reported during the 30-day period preceding the date in
question, or, if no such quotations are available, the Fair Market Value on the
date in question of a share of such stock as determined by the Board of
Directors in good faith, in each case with respect to any class of stock,
appropriately adjusted for any dividend or distribution in shares of such stock
or any stock split or reclassification of outstanding shares of such stock into
a greater number of shares of such stock or any combination or reclassification
of outstanding shares of such stock into a smaller number of shares of such
stock, and (b) in the case of property other than cash or stock, the Fair Market
Value of such property on the date in question as determined by the Board of
Directors in good faith.
8. Reference to "Highest Per Share Price" shall in each
case with respect to any class of stock reflect an appropriate adjustment for
any dividend or distribution in shares of such stock or any stock split or
reclassification of outstanding shares of such stock into a greater number of
shares of such stock or any combination or reclassification of outstanding
shares of such stock into a smaller number of shares of such stock.
9. In the event of any Business Combination in which the
Corporation survives, the phrase "consideration other than cash to be received"
as used in Subparagraphs (a) and (b) of Paragraph 2 of Section B of this Article
EIGHTH shall include the shares of Common Stock and/or the shares of any other
class of outstanding Voting Stock retained by the holders of such shares.
D. A majority of the Directors of the Corporation shall have
the power and duty to determine for the purposes of this Article EIGHTH, on the
basis of information known to them after reasonable inquiry: (a) whether a
person is an Interested Stockholder; (b) the number of shares of Voting Stock
beneficially owned by any person; (c) whether a person
15
<PAGE>
is an Affiliate or Associate of another; and (d) whether the assets which are
the subject of any Business Combination have, or the consideration to be
received for the issuance or transfer of securities by the Corporation or any
Subsidiary in any Business Combination has an aggregate Fair Market Value
equaling or exceeding 25% of the combined Fair Market Value of the common stock
of the Corporation and its Subsidiaries. A majority of the Directors shall have
the further power to interpret all of the terms and provisions of this Article
EIGHTH.
E. Nothing contained in this Article EIGHTH shall be construed
to relieve any Interested Stockholder from any fiduciary obligation imposed by
law.
F. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least 80 percent of the voting power of all of the then-
outstanding shares of the Voting Stock, voting together as a single class, shall
be required to alter, amend or repeal this Article EIGHTH.
NINTH: The Board of Directors of the Corporation, when evaluating any
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offer of another Person (as defined in Article EIGHTH hereof) to (A) make a
tender or exchange offer for any equity security of the Corporation, (B) merge
or consolidate the Corporation with another corporation or entity or (C)
purchase or otherwise acquire all or substantially all of the properties and
assets of the Corporation, may, in connection with the exercise of its judgment
in determining what is in the best interest of the Corporation and its
stockholders, give due consideration to all relevant factors, including, without
limitation, the social and economic effect of acceptance of such offer on the
Corporation's present and future customers and employees and those of its
Subsidiaries (as defined in Article EIGHTH hereof); on the communities in which
the Corporation and its Subsidiaries operate or are located; on the ability of
the Corporation to fulfill its corporate objective as a savings and loan holding
company and on the ability of its
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subsidiary savings bank to fulfill the objectives of a federally-chartered stock
form savings bank under applicable statutes and regulations.
TENTH: A. Each person who was or is made a party or is threatened to
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be made a party to or is otherwise involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (hereinafter a
"proceeding"), by reason of the fact that he or she is or was a Director or an
Officer of the Corporation or is or was serving at the request of the
Corporation as a Director, Officer, employee or agent of another corporation or
of a partnership, joint venture, trust or other enterprise, including service
with respect to an employee benefit plan (hereinafter an "indemnitee"), whether
the basis of such proceeding is alleged action in an official capacity as a
Director, Officer, employee or agent or in any other capacity while serving as a
Director, Officer, employee or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent authorized by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than such law permitted
the Corporation to provide prior such amendment), against all expense, liability
and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or
penalties and amounts paid in settlement) reasonably incurred or suffered by
such indemnitee in connection therewith; provided, however, that, except as
provided in Section C hereof with respect to proceedings to enforce rights to
indemnification, the Corporation shall indemnify any such indemnitee in
connection with a proceeding (or part thereof) initiated by such indemnitee only
if such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation.
B. The right to indemnification conferred in Section A of this
Article TENTH shall include the right to be paid by the Corporation the expenses
incurred in defending any such proceeding in advance of its final disposition
(hereinafter an "advancement of expenses"); provided, however, that, if the
Delaware General Corporation Law requires, an advancement of expenses incurred
by an indemnitee in his or her capacity as a Director or Officer (and not in any
other capacity in which service was or is rendered by such indemnitee,
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including, without limitation, services to an employee benefit plan) shall be
made only upon delivery to the Corporation of an undertaking (hereinafter an
"undertaking"), by or on behalf of such indemnitee, to repay all amounts so
advanced if it shall ultimately be determined by final judicial decision from
which there is no further right to appeal (hereinafter a "final adjudication")
that such indemnitee is not entitled to be indemnified for such expenses under
this Section or otherwise. The rights to indemnification and to the advancement
of expenses conferred in Sections A and B of this Article TENTH shall be
contract rights and such rights shall continue as to an indemnitee who has
ceased to be a Director, Officer, employee or agent and shall inure to the
benefit of the indemnitee's heirs, executors and administrators.
C. If a claim under Section A or B of this Article TENTH is not
paid in full by the Corporation within sixty days after a written claim for an
advancement of expenses, in which case the applicable period shall be twenty
days, the indemnitee may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim. If successful in whole or
in part in any such suit, or in a suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the indemnitee
shall be entitled to be paid also the expenses of prosecuting or defending such
suit. In (i) any suit brought by the indemnitee to enforce a right to
indemnification hereunder (but not in a suit brought by the indemnitee to
enforce a right to an advancement of expenses) it shall be a defense that, and
(ii) in any suit by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking the Corporation shall be entitled to
recover such expenses upon a final adjudication that, the indemnitee has not met
any applicable standard for indemnification set forth in the Delaware General
Corporation Law. Neither the failure of the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification of the
indemnitee is proper in the circumstances because the indemnitee has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the Corporation (including its Board of
Directors, independent legal counsel, or its stockholders) that the indemnitee
has not met such applicable standard of conduct, shall create a presumption that
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the indemnitee has not met the applicable standard of conduct or, in the case of
such a suit brought by the indemnitee, be a defense to such suit. In any suit
brought by the indemnitee to enforce a right to indemnification or to an
advancement of expenses hereunder, or by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of
proving that the indemnitee is not entitled to be indemnified, or to such
advancement of expenses, under this Article TENTH or otherwise shall be on the
Corporation.
D. The rights to indemnification and to the advancement of
expenses conferred in this Article TENTH shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute, the
Corporation's Certificate of Incorporation, By-laws, agreement, vote of
stockholders or Disinterested Directors or otherwise.
E. The Corporation may maintain insurance, at its expense, to
protect itself and any Director, Officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the Delaware General Corporation Law.
F. The Corporation may, to the extent authorized from time to
time by the Board of Directors, grant rights to indemnification and to the
advancement of expenses to any employee or agent of the Corporation to the
fullest extent of the provisions of this Article TENTH with respect to the
indemnification and advancement of expenses of Directors and Officers of the
Corporation.
ELEVENTH: A Director of this Corporation shall not be personally
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liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director, except for liability (i) for any breach of the
Directors duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law,
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or (iv) for any transaction from which the Director derived an improper personal
benefit. If the Delaware General Corporation Law is amended to authorize
corporate action further eliminating or limiting the personal liability of
Directors, then the liability of a Director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders
of the Corporation shall not adversely affect any right or protection of a
Director of the Corporation existing at the time of such repeal or modification.
TWELFTH: The Corporation reserves the right to amend or repeal any
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provision contained in this Certificate of Incorporation in the manner
prescribed by the laws of the State of Delaware and all rights conferred upon
stockholders are granted subject to this reservation; provided, however, that,
notwithstanding any other provision of this Certificate of Incorporation or any
provision of law which might otherwise permit a lesser vote or no vote, but in
addition to any vote of the holders of any class or series of the stock of this
corporation required by law or by this Certificate of Incorporation, the
affirmative vote of the holders of at least 80 percent of the voting power of
all of the then-outstanding shares of the capital stock of the Corporation
entitled to vote generally in the election of Directors (after giving effect to
the provisions of Article FOURTH), voting together as a single class, shall be
required to amend or repeal this Article TWELFTH, Section C of Article FOURTH,
Sections C or D of Article FIFTH, Article SIXTH, Article SEVENTH, Article EIGHTH
or Article TENTH.
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Exhibit 10(ii)
LIBERTY FEDERAL BANK
EMPLOYMENT AGREEMENT
This AGREEMENT is made effective as of August 29, 1994 by and between
Liberty Federal Bank (the "Bank"), a federally chartered savings institution,
with its principal administrative office at One Grant Square, Hinsdale, Illinois
60521 and Fredric G. Novy (the "Executive"). Any reference to the "Company"
herein shall mean Alliance Bancorp or any successor thereto.
WHEREAS, the Company wishes to assure itself of the services of Executive
for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Bank on a
full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein contained,
and upon the other terms and conditions hereinafter provided, the parties hereby
agree as follows:
1. POSITION AND RESPONSIBILITIES
During the period of his employment hereunder, Executive agrees to serve
as the Chairman of the Board of Directors. During said period, Executive also
agrees to serve, if elected, as an officer and director of any subsidiary or
affiliate of the Bank or failure to nominate Executive as director without the
consent of the Executive shall constitute a breach of this Agreement.
2. TERMS AND DUTIES
(a) The term of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for a period of thirty-six (36) full
calendar months thereafter. Commencing on the first anniversary date of this
Agreement, and continuing at each anniversary date thereafter, the Agreement
shall renew for an additional year such that the remaining term shall be three
(3) years unless written notice is provided to Executive at least ten (10) days
and not more that twenty (20) days prior to any such anniversary date, that this
Agreement shall cease at the end twenty four (24) months following such
anniversary date. Prior to the written notice period for non-renewal, the Board
of Directors of the Bank ("Board") will conduct a formal performance evaluation
of the Executive for purposes of determining whether to extend the Agreement,
and the results thereof shall be included in the minutes of the Board's meeting.
(b) During the period of his employment hereunder, except for periods of
absence occasioned by illness, reasonable vacation periods, and reasonable
leaves of absence, Executive shall devote a substantial portion of his business
time, attention, skill, and efforts to the faithful performance of his duties
hereunder including activities and services related to the organization,
operation and management of the Bank; provided, however, that with the approval
of the Board, as evidenced by a resolution of such Board, from time to time,
Executive may serve, or continue to serve, on the boards of directors of, and
hold any other offices or positions in companies or organizations, which, in
such Board's judgement, will not present any conflict of interest with the Bank,
or materially affect the performance of Executive's duties pursuant to this
Agreement.
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3. COMPENSATION AND REIMBURSEMENT
(a) The compensation specified under this Agreement shall constitute the salary
and benefits paid for the duties described in Sections 1 and 2. The Bank shall
pay Executive as compensation a salary of not less than $200,000 per year ("Base
Salary"). Such Base Salary shall be payable bi-weekly. During the period of this
Agreement, Executive's Base Salary shall be reviewed at least annually; the
first such review will be made no later than one year from the date of this
Agreement. Such review shall be conducted by a Committee designated by the
Board, and the Board may increase Executive's Base Salary. The increased Base
Salary shall become the "Base Salary" for purposes of this Agreement.
(b) Subject to the next sentence Executive will be entitled to participate in
or receive benefits under any employee benefit plans arrangements and
perquisites including but not limited to, retirement plans, supplemental
retirement plans, pension plans, profit-sharing plans, health-and-accident plan,
medical coverage or any other employee benefit plan or arrangement or perquisite
made available by the Bank from time to time to permanent full-time employees of
the Bank or the Company or to their senior executives and key management
employees, subject to and on a basis consistent with the terms, conditions, and
overall administration of such plans and arrangements and the bank will not,
without Executive's prior written consent, make any changes in such plans,
arrangements or perquisites which would adversely affect Executive's rights or
benefits thereunder. Notwithstanding the foregoing, Executive will not be
eligible to participate in any group health plan (ad defined in Section 4980B of
the Internal Revenue Code of 1986 (the "Code")) maintained by the bank or the
Company without his written consent therefore. Executive will be entitled to
incentive compensation and bonuses as provided in any plan of the Bank in which
Executive is eligible to participate. Nothing paid to the Executive under any
such plan or arrangement will be deemed to be in lieu of other compensation to
which the Executive is entitled under this Agreement.
(c) In addition to the Base Salary provided for by paragraph (a) of this
Section 3, the Bank shall pay or reimburse Executive for all reasonable travel
and other reasonable expenses incurred by the Executive's performing his
obligations under this Agreement and may provide such additional compensation in
such form and such amounts as the Board may from time to time determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined) during
the Executive's term of employment under this Agreement, the provisions of this
Section shall apply. As used in this Agreement, an "Event of Termination" shall
mean and include any one or more of the following: (i) the termination by the
Bank or the Company of Executive's full time employment hereunder for any reason
other than a Change in Control, as defined in Section 5(a) hereof or,
disability, as defined in Section 6(a) hereof, retirement, as defined in Section
(7) hereof, or for Cause, as defined in Section 8 hereof; (ii) Executive's
resignation from the Bank's employ, upon (A) any failure to elect or reelect or
to appoint or reappoint Executive as Chairman of the Board of Directors or
failure to nominate Executive as director, unless consented to by the Executive,
(B) unless consented to by the Executive, a material change in Executive's
function, duties, or responsibilities which change would cause Executive's
position to become one of lesser responsibility, importance, or scope from the
position and attributes thereof described in Sections 1 and 2, above (and any
such material change shall be deemed a continuing breach of this Agreement),
unless consented to by the Executive, (C) a relocation of Executive's principal
place of employment by the more than 30 miles from its location at the effective
date of this Agreement, unless consented to by the Executive (D) a material
reduction in the benefits
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and perquisites to the Executive from those being provided as of the effective
date of this Agreement, (E) liquidation or dissolution of the Bank or Company,
or (F) breach of this Agreement by the Bank. Upon the occurrence of any event
described in clauses (A), (B), (C), (D), (E), or (F) above, Executive shall have
the right to elect to terminate his employment under this Agreement by
resignation upon not less than sixty (60) days prior written notice given within
a reasonable period of time not to exceed, except in case of a continuing
breach, four calendar months after the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, the Bank shall pay
Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be, as severance pay or liquidated
damages, or both, a sum equal to the greater of : (i) the payments due to the
Executive for the remaining term of the Agreement, or (ii) one (1) times
Executive's average annual compensation for the three (3) preceding taxable
years. Such annual compensation shall include any salary, fees, commissions,
bonuses, contributions made or accrued on behalf of the Executive, to any
pension and profit sharing plan, severance payments, directors' committee fees,
and fringe benefits paid or to be paid to the Executive during such year. At the
election of the Executive which election is to be made prior to an Event of
Termination, such payments shall be made in a lump sum or paid monthly during
the remaining term of this Agreement following the Executive's termination. In
the event that no election is made, payment to the Executive will be made on a
monthly basis during the remaining term of this Agreement.
(c) Upon the occurrence of an Event of Termination, the Bank will cause to be
continued life, medical, dental, and disability coverage substantially identical
to the coverage maintained by the Bank for Executive prior to his termination.
Such coverage shall cease upon the expiration of the remaining term of this
Agreement.
(d) In the event that the Executive is receiving monthly payments pursuant to
Section 4(b) hereof, on an annual basis, thereafter, prior to the commencement
of each calendar year, Executive shall elect whether the balance of the amount
payable under the Agreement at the commencement of each calendar year shall be
paid in a lump sum or on a pro rata basis. Such election shall be irrevocable
for the year for which such election is made.
5. CHANGE IN CONTROL
(a) For purposes if this Agreement, a "Change in Control" of the Bank or
Company shall mean an event of a nature that: (i) would be required to be
reported in response to Item 1(a) of the current report on a Form 8-K, as in
effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a Change in
Control of the Bank or the Company within the meaning of the Home Owners' Loan
Act of 1933 and the Rules and Regulations promulgated by the Office of Thrift
Supervision (or its predecessor agency), as in effect on the date hereof,
(provided that in applying the definition of change in control as set forth
under the Rules and Regulations of the OTS, the Board shall substitute its
judgement for that of the OTS); or (iii) without limitation such a Change in
Control shall be deemed to have occurred at such time as (a) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of voting securities of the Bank or the Company
representing 20% or more of the Bank's or the Company's outstanding voting
securities except for any voting securities of the Bank purchased by the Company
and any voting securities purchased by any employee benefit plan of the Bank or
Company; or (b) individuals who constitute the Board on the date hereof (the
"Incumbent Board") cease for any reason to constitute
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at least a majority thereof, provided that any person becoming a director
subsequent to the date hereof whose election was approved by a vote of at least
three-quarters of the directors comprising the Incumbent Board, or whose
nomination for election was approved by the same Nominating Committee serving
under an Incumbent Board, shall be, for purposes of this clause (b), considered
as though he were a member of the Incumbent Board; or (c) a plan of
reorganization, merger, consolidation, sale of all or substantially all the
assets of the Bank or the Company or similar transaction occurs in which the
Bank or Company is not the resulting entity; provided however, that such an
event listed above will be deemed to have occurred or to have been effectuated
upon the receipt of all required federal regulatory approvals not including the
laps of any statutory waiting periods; (d) a proxy statement shall be
distributed soliciting proxies from stockholders of the Company, by someone
other than the current management of the Company seeking stockholder approval of
a plan of reorganization, merger or consolidation of the Company or bank with
one or more corporations as a result of which the outstanding shares of the
class of securities then subject to such plan transaction are exchanged for or
converted into cash or property or securities not issued by the Bank or the
Company shall be distributed; or (e) a tender offer is made for 20% or more of
the voting securities of the Bank or the Company then outstanding.
(b) If a Change in Control has occurred pursuant to Section 5(a) hereof or the
Board has determined that a Change in Control has occurred, and Executive's
employment with the Bank terminations at any time thereafter during the term of
this Agreement due to his dismissal or his resignation following any demotion,
loss of title or office, or significant reduction in authority or
responsibility, significant reduction in annual compensation or benefits or
relocation of his principal place of employment by more than 30 miles from its
location immediately prior to the Change in Control), unless such termination is
because of his death, Termination for Cause or Termination for Disability.
(c) Upon the Executive's entitlement to benefits pursuant to Section 5(b)
hereof, the Bank shall pay Executive, or in the event of his subsequent death,
his beneficiary or beneficiaries, or his estate, as the case may be, as
severance pay or liquidated damages, or both, a sum equal to the greater of :
(i) the payments due for the remaining term of the Agreement or (ii) three (3)
times Executive's average annual compensation for three (3) preceding taxable
years. Such annual compensation shall include any salary, fees, commissions,
bonuses, contributions made or accrued on behalf of the Executive, to any
pension and profit sharing plan, severance payments, directors committee fees,
and fringe benefits paid or to be paid to the Executive during such year. At the
election of the Executive, which election is to be made prior to Executive's
termination of employment, such payment may be made in a lump sum or paid in
equal monthly installments during the thirty-six (36) months following the
Executive's termination. In the event that no election is made, payment to the
Executive will be made on a monthly basis during the remaining term of the
Agreement.
(d) Upon the Executive's entitlement to benefits pursuant to Section 5(b)
hereof, the Bank will cause to be continued life, medical, dental, and
disability coverage substantially identical to the coverage maintained by the
Bank or the Company for Executive prior to his termination. Such coverage and
payments shall cease upon the expiration of thirty-six (36) months.
(e) In the event that the Executive is receiving monthly payments pursuant to
Section 5(c) hereof, on an annual basis, thereafter, prior to the commencement
of each calendar year, Executive shall elect whether the balance of the amount
payable under the Agreement at the commencement of such calendar year shall be
paid in a lump sum or on a pro rata basis pursuant to such section. Such
election shall be irrevocable for the year for which such election is made.
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(f) Notwithstanding the preceding paragraphs of this Section 5, in the event
that:
(i) the aggregate payments or benefits to be made or afforded to
Executive under said paragraph (the "Termination Benefits") would be
deemed to include an "excess parachute payment" under Section 280G of
the Internal Revenue Code, or any successor thereto, and
(ii) if such Termination Benefits were reduced to an amount (the "Non-
Triggering Amount"), the value of which is one dollar ($1.00) less
than an amount equal to three (3) times Executive's "base amount", as
determined in accordance with said Section 280G, and the Non-
Triggering Amount would be greater than the aggregate value of the
Termination Benefits shall be reduced to the Non-Triggering Amount.
The application of said Section 280G, and the allocation of the
reduction required by the preceding paragraphs of this Section 5,
shall be determined by the Executive.
6. TERMINATION FOR DISABILITY
(a) If, as a result of Executive's incapacity due to physical or mental
illness, he shall have been absent from his duties with the Bank on a full-time
basis for six (6) consecutive months, and within thirty (30) days after written
notice of potential termination is given he shall not have returned to the full-
time performance of his duties, the Bank or the Company may terminate
Executive's employment for "Disability".
(b) The Bank will pay Executive, as disability pay, a bi-weekly payment equal
to three quarters (3/4) of Executive's bi-weekly rate of Base Salary on the
effective date of such termination. These disability payments shall commence on
the effective date of Executive's termination and will end on the earlier of:
(i) the date Executive returns to the full-time employment of the Bank in same
capacity as he was employed prior to his termination for Disability and pursuant
to an employment agreement between Executive and the Bank; (ii) Executive's
full-time employment by another employer; (iii) Executive attaining the age of
65; or (iv) Executive's death. The disability pay shall be reduced by the
amount, if any, paid to the Executive under any plan of the Bank or the Company
providing disability benefits to the Executive.
(c) The Bank will cause to be continued life, medical, dental, and disability
coverage substantially identical to the coverage maintained by the Bank for
Executive prior to his termination for Disability. This coverage and payments
shall cease upon the earlier of: (i) the date Executive returns to the full-time
employment of the Bank, in the same capacity as he was employed prior to his
termination for Disability and pursuant to an employment agreement between
Executive and the Bank; (ii) Executive's full-time employment by another
employer; or (iii) the Executive's attaining of the age of 65; or (iv) the
Executive's death.
(d) Notwithstanding the foregoing, there will be no reduction in the
compensation otherwise payable to the Executive during any period during which
Executive is incapable of performing his duties hereunder by reason of temporary
disability.
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7. TERMINATION UPON RETIREMENT
Termination by the Bank of the Executive upon "Retirement" shall mean
retirement at age 65 or in accordance with any retirement arrangement
established with Executive's consent with respect to him. Upon termination
of Executive upon Retirement, Executive shall be entitled to all benefits
under retirement plan of the Bank or the Company and other plans to which
Executive is a party.
8. TERMINATION FOR CAUSE
The term "Termination for Cause" shall mean termination upon intentional
failure to perform stated duties, which results in loss to the Bank or one
of its affiliates, willful violation of any law, rule regulation (other
than traffic violations or similar offenses) or final cease-and-desist
order, which results in substantial loss to the bank or one of its
affiliates, or any material breach of this Agreement. For purposes of this
Section, no act, or the failure to act, on Executive's part shall be
"willful" unless done, or omitted to be done, not in good faith and without
reasonable belief that the action or omission was in the best interests of
the Bank or its affiliates. Notwithstanding the foregoing, Executive shall
not be deemed to have been terminated for cause unless and until there
shall have been delivered to him a copy of a resolution duly adopted by the
affirmative vote of not less than three fourths of the members of the Board
at a meeting of the Board called and held for that purpose (after
reasonable notice to Executive and an opportunity for him, together with
counsel, to be heard before the Board), finding that in the good faith
opinion of the Board, Executive was guilty of conduct justifying
Termination for cause and specifying the reasons thereof. The Executive
shall not have the right to receive compensation or other benefits for any
period after Termination for Cause. Any stock options and related limited
rights granted to Executive under any stock option plan or any unvested
awards granted under any other stock benefit plan of the Bank, the Company
or any subsidiary or affiliate thereof, shall become null and void
effective upon Executive's receipt of Notice of Termination for Cause
pursuant to Section 9 hereof, and shall not be exercisable by Executive at
any time subsequent to such termination for cause.
9. NOTICE
(a) Any purported termination by the Bank or by Executive shall be communicated
by Notice of Termination to the other party hereto. For purposes of this
Agreement, a "Notice of Termination" shall mean a written notice which shall
indicate the specific termination provision in this Agreement relied upon and
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean (A) if Executive's employment is
terminated for Disability, thirty (30) days after a Notice of Termination is
given (provided that he shall not have returned to the performance of his duties
on a full-time basis during such thirty (30) day period), and (B) if his
employment is terminated for any other reason, the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is given, the
party receiving such Notice of Termination notifies the other party that a
dispute exists concerning the termination, except upon the occurrence of a
change in Control and voluntary termination by the Executive in which case the
Date
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of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgement, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Bank will continue to pay
Executive his full compensation if effect when the notice giving rise to the
dispute was given (including, but not limited to, Base Salary) and continue him
as a participant in all compensation, benefit and insurance plans in which he
was participating when the notice of dispute was given, until the dispute is
finally resolved in accordance with this Agreement. Amounts paid under this
Section are in addition to other amounts due under this Agreement and shall not
be offset against or reduce any other amounts due under this Agreement.
10. POST-TERMINATION OBLIGATIONS
All payments and benefits to Executive under this Agreement shall be subject to
Executive's compliance with this Section 10 for one (1) full year after the
earlier of the expiration of this Agreement or termination of employment with
the Bank. Executive shall upon reasonable notice, furnish such information and
assistance to the Bank as may reasonably be required by the Bank in connection
with any litigation in which it or any of its subsidiaries or affiliates is, or
may become, a party.
11. NON-COMPETITION
(a) Upon any termination of Executive's employment hereunder, Executive agrees
not to compete with the Bank and/or the Company for a period of one (1) year
following such termination in any city, town, or county in which the Bank and/or
the Company has an office or has filed an application for regulatory approval to
establish an office determined as of the effective date of such termination,
except for Cook County and as otherwise agreed to pursuant to a resolution duly
adopted by the Board. Executive agrees that during such period and within said
cities, towns and counties, Executive shall not work for or advise, consult or
otherwise serve with, directly or indirectly, and entity whose business
materially competes with the depository, lending or other business activities of
the Bank and/or the Company. The parties hereto, recognizing that irreparable
injury will result to the Bank and/or the Company, its business and property in
the event of Executive's breach of this Subsection 11(a) agree that in the event
of any such breach by Executive, the Bank and/or the Company will be entitled,
in addition to any other remedies and damages available, to an injunction to
restrain the violation hereof by Executive, Executive's partners, agents,
servants, employers, employees and all persons acting for or with Executive.
Executive represents and admits that in the event of the termination of his
employment pursuant to or Section 8 hereof, Executive's experience and
capabilities are such that Executive can obtain employment in a business engaged
in other lines and/or of a different nature than the Bank and/or the Company,
and that the enforcement of a remedy by way of injunction will not prevent
Executive from earning a livelihood. Nothing herein will be construed as
prohibiting the Bank and/or the Company from pursuing any other remedies
available to the Bank and/or Company for such breach or threatened breach,
including the recovery of damages from Executive.
7
<PAGE>
(b) Executive recognizes and acknowledges that the knowledge of the business
activities and plans for business activities of the Bank and affiliates thereof,
as it may exist from time to time, is a valuable, special and unique asset of
the business of the Bank. Executive will not, during or after the term of his
employment, disclose any knowledge of the past, present, planned or considered
business activities of the Bank or affiliates thereof to any person, firm,
corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, Executive may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Bank. In the
event of a breach or threatened breach by the Executive of the provisions of
this Section, the Bank will be entitled to an injunction restraining Executive
from disclosing, in whole or in part, the knowledge of the past, present,
planned, or considered business activities of the Bank or affiliates thereof, or
from rendering any services to any person, firm, corporation, other entity to
whom such knowledge, in whole or in part, has been disclosed or is threatened to
be disclosed. Nothing herein will be construed as prohibiting the Bank from
pursuing any other remedies available to the Bank for such breach or threatened
breach, including the recovery of damages from Executive.
12. SOURCE OF PAYMENTS
All payments provided in this Agreement shall be timely paid in cash or check
from the general funds of the Bank. The Company, however, guarantees payment and
provision of all amounts and benefits due hereunder to Executive and, if such
amounts and benefits due from the Bank are not timely paid or provided by the
Bank, such amounts and benefits shall be paid or provided by the Company.
13. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS
This Agreement contains the entire understanding between the parties hereto and
supersedes any prior employment agreement between the Bank or any predecessor of
the Bank and Executive, except that this Agreement shall not affect or operate
to reduce any benefit or compensation inuring to the Executive of a kind
elsewhere provided. No provision of this Agreement shall be interpreted to mean
that Executive is subject to receiving fewer benefits than those available to
him without reference to this Agreement.
14. NO ATTACHMENT
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary to affect any such action shall be null, void,
and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Bank and their respective successors and assigns.
15. MODIFICATION AND WAIVER
(a) This Agreement may not be modified or amended except by an instrument in
writing signed by the parties hereto.
8
<PAGE>
(b) No term or condition of this Agreement shall be deemed to have been waived,
nor shall there be any estoppel against the enforcement of any provision of this
Agreement, except by written instrument of the party charged with such waiver or
estoppel. No such written waiver shall be deemed a continuing waiver unless
specifically stated therein, and each such waiver shall operate only as to the
specific term or condition waived and shall not constitute a waiver of such term
or condition for the future as to any act other than that specifically waived.
16. REQUIRED PROVISIONS
(a) The Bank may terminate the Executive's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Executive's right to compensation or other benefits under this Agreement.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause as defined in Section 8 hereinabove.
(b) If the Executive is suspended from office and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8 (g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(3) or (g)(1)) the Bank's obligations under this contract shall be
suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank may in its discretion: (i)
pay the Executive all or part of the compensation withheld while their contract
obligations were suspended and (ii) reinstate (in whole or in part) any of the
obligations which were suspended.
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) (12 U.S.C. (S)1818(e)(4)) or 8 (g)(1) of the Federal Deposit
Insurance Act, (12 U.S.C. (S)1818(e)(4) or (g)(10) all obligations of the Bank
under this contract shall terminate as of the effective date of the order, but
vested rights of the contracting parties shall not be affected.
(d) If the Bank is in default (as defined in Section 3(x)(1) (12 U.S.C.
(S)1813(x)(1)) of the Federal Deposit Insurance Act) all obligations of the Bank
under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be terminated, except
to the extent determined that continuation of the contract is necessary for the
continued operation of the institution, (i) by the Federal Deposit Insurance
Corporation, at the time FDIC enters into the agreement to provide assistance to
or on behalf of the Bank under the authority contained in Section 13(c)
(12 U.S.C. (S) 1823(c)) of the Federal Deposit Insurance Act; or (ii) by the
Office of Thrift Supervision ("OTS") at the time the OTS or its District
Director approves a supervisory merger to resolve problems related to the
operations of the Bank or when the Bank is determined by the OTS or FDIC to be
in an unsafe or unsound condition. Any rights of the parties that have already
vested, however, shall not be affected by such action.
(f) Any payments made to the Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
(S)1828(k) and any regulations promulgated thereunder.
17. SEVERABILITY
If, for any reason, any provision of this Agreement, or any part of any
provision, is held
9
<PAGE>
invalid, such invalidity shall not affect any other provision of this Agreement
or any part of such provision not held so invalid, and each such other provision
and part thereof shall to the full extent consistent with law continue in full
force and effect.
18. HEADINGS FOR REFERENCE ONLY
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
19. GOVERNING LAW
This Agreement shall be governed by the laws of the State of Illinois,
unless otherwise specified herein.
20. ARBITRATION
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by the employee within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgement may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
21. PAYMENT OF LEGAL FEES
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question or interpretation relating to this Agreement shall be paid
or reimbursed by the Bank if Executive is successful pursuant to a legal
judgement, arbitration or settlement.
21. INDEMNIFICATION
(a) The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense, or in lieu thereof, shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under federal law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the Bank (whether or not he continues to be a director or officer
at the time of incurring such expenses or liabilities), such expenses and
liabilities to include, but not be limited to, judgements, court costs and
attorneys' fees and the cost of reasonable settlements.
22. SUCCESSOR TO THE BANK
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or the Company, expressly
and unconditionally to assume and agree to perform the Bank's obligations under
this Agreement, in the same manner and to the same extent that the Bank would be
required to perform if no such successor or assignment had taken place.
10
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, Liberty Federal Bank and Alliance Bancorp has caused
this Agreement to be executed and its seal to be affixed hereunto by its duly
authorized officer, and Executive has signed this Agreement on the 10th day of
February, 1997.
ATTEST: LIBERTY FEDERAL BANK
______________________________________ _______________________________________
Richard A. Hojnicki Kenne P. Bristol, President
Executive Vice President and Secretary
SEAL
WITNESS: EXECUTIVE:
______________________________________ _______________________________________
Fredric G. Novy
11
<PAGE>
Exhibit 10(iv)
LIBERTY FEDERAL BANK
SPECIAL TERMINATION AGREEMENT
This AGREEMENT is made effective as of AUGUST 20, 1997, by and between
Liberty Federal Bank (the "Bank"), a Federally chartered savings institution,
with its office at One Grant Square, Hinsdale, Illinois and
______________________ (the "Executive"). The Bank is the wholly-owned
subsidiary of Alliance Bancorp (the "Company"), a corporation organized under
the laws of the State of Delaware.
WHEREAS, Executive has been appointed to, and has agreed to serve in, the
position of
____________________________ of the Bank, a position of substantial
responsibility.
NOW, THEREFORE, in consideration of the contribution and responsibilities of
Executive, and upon the other terms and conditions hereinafter provided, the
parties hereto agree as follows:
1. TERM OF AGREEMENT
-----------------
The term of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for a period of twelve (12) full
calendar months thereafter. Commencing on the first anniversary date of this
Agreement and continuing at each anniversary date thereafter, the agreement
shall renew for an additional period of one year unless written notice is
provided to Executive at least ten (10) days and not more than twenty (20) days
prior to any such anniversary date, which said written notice shall provide that
this Agreement shall cease on the first anniversary date hereof.
2. PAYMENTS TO EXECUTIVE IN CONNECTION WITH A CHANGE IN CONTROL
------------------------------------------------------------
(a) Upon the occurrence of a Change in Control of the Company (as
herein defined) followed at any time during the term of this
Agreement by the involuntary or voluntary termination of
Executive's employment, other than for Cause as defined in Section
2(c) hereof, the provisions of Section 3 shall apply. Further, upon
the occurrence of a Change in Control as defined herein, Executive
shall have the right to elect to voluntarily terminate employment
at any time during the term of this Agreement and receive the
benefits specified in Section 3 of this Agreement, provided that
the voluntary termination of employment follows the relocation of
the Executive's principal place of employment by more than fifty
(50) miles from its location immediately prior to the Change in
Control. The obligations of the Company under this Agreement,
including the obligation as to providing notice to Executive of
termination under Section 4 and the obligation to pay benefits
under Section 3, shall arise only in the event that there has been
a Change in Control of the Company or the Bank, as defined in
Section 2(b).
(b) A "Change in Control" of the Bank or the Company shall be deemed to
have occurred at such time as (i) any "person" (as the term is used
in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934
(the "Exchange Act")) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities, or makes an offer to purchase
securities, of the Company representing 20% or more of the combined
voting power of the Company's outstanding securities, except for
any securities purchased by an employee stock ownership plan
established by the Company or the Bank and approved by the
Incumbent Board (as defined below);
<PAGE>
or (ii) individuals who constitute the Board of Directors of the
Company on the date hereof (the "Incumbent Board") cease for any
reason to constitute at least fifty percent thereof, provided that
any person becoming a director subsequent to the date hereof whose
election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for
election by the Company's stockholders was approved by the
Company's Nominating Committee, shall be, for purposes of this
clause (b), considered as though he were a member of the Incumbent
Board.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 hereof following a Change in Control upon
Termination for Cause. The term "Termination for Cause" shall mean
termination upon intentional failure to perform stated duties,
personal dishonesty which results in loss to the Company or one of
its affiliates, a willful violation of any law, rule, regulation
(other than traffic violations or similar offenses) or a final
cease and desist order which results in substantial loss to the
Company or one of its affiliates, or any material breach of this
Agreement. For purposes of this Section, no act, or the failure to
act, on Executive's part shall be "willful" or "intentional" unless
done, or omitted to be done, not in good faith and without
reasonable belief that the action or omission was in the best
interest of the Company or its affiliates.
Not withstanding the foregoing, Executive shall not be deemed to
have been Terminated for Cause unless and until there shall have
been delivered to the Executive a copy of a resolution duly adopted
by the affirmative vote of not less than three fourths of the Board
at a meeting of the Board called and held for that purpose (after
reasonable notice to the Executive and an opportunity for the
Executive, together with counsel, to be heard before the Board),
finding that in the good faith opinion of the Board, the Executive
was guilty of conduct justifying Termination for Cause and
specifying the particulars thereof in detail. Any stock options or
limited rights granted to the Executive under any stock option plan
or any unvested awards granted under any other stock benefit plan
of the Bank, the Company or any subsidiary thereof, shall become
null and void effective upon Executive's receipt of Notice of
Termination for Cause pursuant to Section 4 hereof and shall not be
exercisable by Executive at any time subsequent to such Termination
for Cause, unless it is determined in arbitration pursuant to
Section 4 hereof that Cause for the termination of Executive did
not exist, in which event such options shall be exercisable by
Executive for a period of not less than three months from the
arbitration determination.
3. TERMINATION BENEFITS
--------------------
(a) Upon the occurrence of a Change in Control of the Bank or the
Company, followed at any time during the term of this Agreement by the
involuntary or voluntary termination of the Executive's employment, other than
for Termination for Cause, or the voluntary termination of the Executive's
employment with the Bank following the relocation of the Executive's principal
place of employment by more than fifty (50) miles from its location immediately
prior to the Change in Control, the Company shall pay to Executive, or in the
event of the Executive's subsequent death, his/her beneficiary or beneficiaries,
or his/her estate as the case may be, as severance pay or as liquidated damages,
or both, a sum equal to one (1) times the Executive's current Base Salary
including the amount of any salary deferred by Executive pursuant to any
deferred compensation arrangement. At the election of the Executive, which
election is to be made within thirty (30) days of the date of this Agreement,
and during the month of January in each year and which election is irrevocable
for the calendar year in which it is
2
<PAGE>
made, payments under Section 3 of this
Agreement shall be made in a lump sum within thirty (30) days of the date of
severance of Executive's employment, or paid in equal monthly installments
during twelve months following the Executive's termination. In the event that no
election is made, payment to the Executive will be made on a monthly basis
during the remaining term of this Agreement.
(b) Upon the occurrence of a Change in Control of the Bank or the
Company followed at any time during the term on this Agreement by the
Executive's involuntary termination of employment with the Bank, other than for
Termination for Cause, the Bank shall cause to be continued life, medical,
dental, and disability insurance coverage substantially identical to the
coverage maintained by the Bank for the Executive prior to severance. Such
coverage and payments shall cease upon the expiration of thirteen months after
termination of employment.
(c) Notwithstanding the preceding paragraphs of this Section 3, if
payments under this Agreement, together with any other payments received or to
be received by the Executive in connection with a Change in Control would be
deemed to include an "excess parachute payment" pursuant to Section 280G of the
Internal Revenue Code of 1986 as amended, then benefits under this Agreement
shall be reduced (to not less than zero) to the extent necessary to avoid the
payment of an excess parachute payment by the Bank. The Executive shall
determine the allocation of such reduction among payments to the Executive. The
Bank shall be entitled to rely on calculations provided by its independent
auditors as to whether payments to Executive would constitute excess parachute
payment, which shall be binding on Executive.
(d) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 USC
Section 1828(k) and any regulations promulgated thereunder.
4. NOTICE OF TERMINATION
---------------------
Following a Change in Control, any purported termination by the Bank or
by Executive shall be communicated by a Notice of Termination to the other party
hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a
written notice (following a Change in Control) which shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
detail the facts and circumstances claimed to provide a basis for termination of
employment under the provision so indicated. "Date of Termination" shall mean
the date specified in the Notice of Termination (which in the case of a
Termination for Cause, shall not be less than thirty (30) days from the date
such Notice of Termination is given) whether or not such Termination is disputed
by the Executive. Effective as of the Date of Termination, the Company shall
cease to pay the Executive full compensation in effect when the notice giving
rise to the dispute was given (including, but not limited to, annual base
salary), and except for the coverage as provided in accordance with the terms
and conditions set forth in Paragraph 3 (b) of this Agreement, the Executive
shall cease to become a participant in all compensation, benefit and insurance
plans in which he was participating as of the Date of Termination. Nothing
herein shall be construed as limiting the right of the Company or the Bank to
terminate the employment of the Executive at any time and for any reason and to
pay the Executive benefits set forth in Section 3 of this Agreement.
5. SOURCE OF PAYMENTS
------------------
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Bank.
3
<PAGE>
6. NO ATTACHMENT
-------------
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of
the Executive, the Company, the Bank, and their respective successors and
assigns.
7. MODIFICATION AND WAIVER
-----------------------
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
8. SEVERABILITY
-------------
If for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
9. HEADINGS FOR REFERENCE ONLY
---------------------------
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
10. GOVERNING LAW
-------------
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Delaware, unless
otherwise specified herein.
11. ARBITRATION
-----------
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by binding arbitration, conducted before
a panel of three arbitrators sitting in a location selected by the Bank within
fifty (50) miles from Hinsdale, Illinois, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction.
4
<PAGE>
12. SIGNATURES
----------
IN WITNESS WHEREOF, Liberty Federal Bank has caused this Agreement to be
executed by its duly authorized officer, and Executive has signed this
Agreement, as of the date first above written.
LIBERTY FEDERAL BANK
----------------------------
By: By:
------------------------------------ ----------------------------
President and Chief Executive Officer
BY:
-----------------------------------
Secretary
CONSENT OF GUARANTOR (PURSUANT
TO SECTION SIX HEREOF)
ALLIANCE BANCORP.
BY:
-----------------------------------
Chairman
BY:
-----------------------------------
Secretary
5
<PAGE>
LIBERTY FEDERAL BANK
SPECIAL TERMINATION AGREEMENT
This AGREEMENT is made effective as of AUGUST 20, 1997, by and between
Liberty Federal Bank (the "Bank"), a Federally chartered savings institution,
with its office at One Grant Square, Hinsdale, Illinois and
______________________ (the "Executive"). The Bank is the wholly-owned
subsidiary of Alliance Bancorp (the "Company"), a corporation organized under
the laws of the State of Delaware.
WHEREAS, Executive has been appointed to, and has agreed to serve in, the
position of
____________________________ of the Bank, a position of substantial
responsibility.
NOW, THEREFORE, in consideration of the contribution and responsibilities of
Executive, and upon the other terms and conditions hereinafter provided, the
parties hereto agree as follows:
1. TERM OF AGREEMENT
-----------------
The term of this Agreement shall be deemed to have commenced as of the
date first above written and shall continue for a period of twelve (12) full
calendar months thereafter. Commencing on the first anniversary date of this
Agreement and continuing at each anniversary date thereafter, the agreement
shall renew for an additional period of one year unless written notice is
provided to Executive at least ten (10) days and not more than twenty (20) days
prior to any such anniversary date, which said written notice shall provide that
this Agreement shall cease on the first anniversary date hereof.
2. PAYMENTS TO EXECUTIVE IN CONNECTION WITH A CHANGE IN CONTROL
------------------------------------------------------------
(a) Upon the occurrence of a Change in Control of the Company (as
herein defined) followed at any time during the term of this
Agreement by the involuntary or voluntary termination of
Executive's employment, other than for Cause as defined in Section
2(c) hereof, the provisions of Section 3 shall apply. Further, upon
the occurrence of a Change in Control as defined herein, Executive
shall have the right to elect to voluntarily terminate employment
at any time during the term of this Agreement and receive the
benefits specified in Section 3 of this Agreement, provided that
the voluntary termination of employment follows the relocation of
the Executive's principal place of employment by more than fifty
(50) miles from its location immediately prior to the Change in
Control. The obligations of the Company under this Agreement,
including the obligation as to providing notice to Executive of
termination under Section 4 and the obligation to pay benefits
under Section 3, shall arise only in the event that there has been
a Change in Control of the Company or the Bank, as defined in
Section 2(b).
(b) A "Change in Control" of the Bank or the Company shall be deemed to
have occurred at such time as (i) any "person" (as the term is used
in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934
(the "Exchange Act")) is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities, or makes an offer to purchase
securities, of the Company representing 20% or more of the combined
voting power of the Company's outstanding securities, except for
any securities purchased by an employee stock ownership plan
established by the Company or the Bank and approved by the
Incumbent Board (as defined below);
<PAGE>
or (ii) individuals who constitute the Board of Directors of the
Company on the date hereof (the "Incumbent Board") cease for any
reason to constitute at least fifty percent thereof, provided that
any person becoming a director subsequent to the date hereof whose
election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for
election by the Company's stockholders was approved by the
Company's Nominating Committee, shall be, for purposes of this
clause (b), considered as though he were a member of the Incumbent
Board.
(c) Executive shall not have the right to receive termination benefits
pursuant to Section 3 hereof following a Change in Control upon
Termination for Cause. The term "Termination for Cause" shall mean
termination upon intentional failure to perform stated duties,
personal dishonesty which results in loss to the Company or one of
its affiliates, a willful violation of any law, rule, regulation
(other than traffic violations or similar offenses) or a final
cease and desist order which results in substantial loss to the
Company or one of its affiliates, or any material breach of this
Agreement. For purposes of this Section, no act, or the failure to
act, on Executive's part shall be "willful" or "intentional" unless
done, or omitted to be done, not in good faith and without
reasonable belief that the action or omission was in the best
interest of the Company or its affiliates.
Not withstanding the foregoing, Executive shall not be deemed to
have been Terminated for Cause unless and until there shall have
been delivered to the Executive a copy of a resolution duly adopted
by the affirmative vote of not less than three fourths of the Board
at a meeting of the Board called and held for that purpose (after
reasonable notice to the Executive and an opportunity for the
Executive, together with counsel, to be heard before the Board),
finding that in the good faith opinion of the Board, the Executive
was guilty of conduct justifying Termination for Cause and
specifying the particulars thereof in detail. Any stock options or
limited rights granted to the Executive under any stock option plan
or any unvested awards granted under any other stock benefit plan
of the Bank, the Company or any subsidiary thereof, shall become
null and void effective upon Executive's receipt of Notice of
Termination for Cause pursuant to Section 4 hereof and shall not be
exercisable by Executive at any time subsequent to such Termination
for Cause, unless it is determined in arbitration pursuant to
Section 4 hereof that Cause for the termination of Executive did
not exist, in which event such options shall be exercisable by
Executive for a period of not less than three months from the
arbitration determination.
3. TERMINATION BENEFITS
--------------------
(a) Upon the occurrence of a Change in Control of the Bank or the
Company, followed at any time during the term of this Agreement by the
involuntary or voluntary termination of the Executive's employment, other than
for Termination for Cause, or the voluntary termination of the Executive's
employment with the Bank following the relocation of the Executive's principal
place of employment by more than fifty (50) miles from its location immediately
prior to the Change in Control, the Company shall pay to Executive, or in the
event of the Executive's subsequent death, his/her beneficiary or beneficiaries,
or his/her estate as the case may be, as severance pay or as liquidated damages,
or both, a sum equal to one and one half (1 1/2) times the Executive's current
Base Salary including the amount of any salary deferred by Executive pursuant to
any deferred compensation arrangement. At the election of the Executive, which
election is to be made within thirty (30) days of the date of this Agreement,
and during the month of January in each year and which election is irrevocable
for the calendar year in which it is made, payments
2
<PAGE>
under Section 3 of this Agreement shall be made in a lump sum within thirty (30)
days of the date of severance of Executive's employment, or paid in equal
monthly installments during twelve months following the Executive's termination.
In the event that no election is made, payment to the Executive will be made on
a monthly basis during the remaining term of this Agreement.
(b) Upon the occurrence of a Change in Control of the Bank or the
Company followed at any time during the term on this Agreement by the
Executive's involuntary termination of employment with the Bank, other than for
Termination for Cause, the Bank shall cause to be continued life, medical,
dental, and disability insurance coverage substantially identical to the
coverage maintained by the Bank for the Executive prior to severance. Such
coverage and payments shall cease upon the expiration of thirteen months after
termination of employment.
(c) Notwithstanding the preceding paragraphs of this Section 3, if
payments under this Agreement, together with any other payments received or to
be received by the Executive in connection with a Change in Control would be
deemed to include an "excess parachute payment" pursuant to Section 280G of the
Internal Revenue Code of 1986 as amended, then benefits under this Agreement
shall be reduced (to not less than zero) to the extent necessary to avoid the
payment of an excess parachute payment by the Bank. The Executive shall
determine the allocation of such reduction among payments to the Executive. The
Bank shall be entitled to rely on calculations provided by its independent
auditors as to whether payments to Executive would constitute excess parachute
payment, which shall be binding on Executive.
(d) Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 USC
Section 1828(k) and any regulations promulgated thereunder.
4. NOTICE OF TERMINATION
---------------------
Following a Change in Control, any purported termination by the Bank or
by Executive shall be communicated by a Notice of Termination to the other party
hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a
written notice (following a Change in Control) which shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
detail the facts and circumstances claimed to provide a basis for termination of
employment under the provision so indicated. "Date of Termination" shall mean
the date specified in the Notice of Termination (which in the case of a
Termination for Cause, shall not be less than thirty (30) days from the date
such Notice of Termination is given) whether or not such Termination is disputed
by the Executive. Effective as of the Date of Termination, the Company shall
cease to pay the Executive full compensation in effect when the notice giving
rise to the dispute was given (including, but not limited to, annual base
salary), and except for the coverage as provided in accordance with the terms
and conditions set forth in Paragraph 3 (b) of this Agreement, the Executive
shall cease to become a participant in all compensation, benefit and insurance
plans in which he was participating as of the Date of Termination. Nothing
herein shall be construed as limiting the right of the Company or the Bank to
terminate the employment of the Executive at any time and for any reason and to
pay the Executive benefits set forth in Section 3 of this Agreement.
5. SOURCE OF PAYMENTS
------------------
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the Bank.
3
<PAGE>
6. NO ATTACHMENT
-------------
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of
the Executive, the Company, the Bank, and their respective successors and
assigns.
7. MODIFICATION AND WAIVER
-----------------------
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
8. SEVERABILITY
-------------
If for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
9. HEADINGS FOR REFERENCE ONLY
---------------------------
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
10. GOVERNING LAW
-------------
The validity, interpretation, performance, and enforcement of this
Agreement shall be governed by the laws of the State of Delaware, unless
otherwise specified herein.
11. ARBITRATION
-----------
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by binding arbitration, conducted before
a panel of three arbitrators sitting in a location selected by the Bank within
fifty (50) miles from Hinsdale, Illinois, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction.
4
<PAGE>
12. SIGNATURES
----------
IN WITNESS WHEREOF, Liberty Federal Bank has caused this Agreement to be
executed by its duly authorized officer, and Executive has signed this
Agreement, as of the date first above written.
LIBERTY FEDERAL BANK
-------------------------------
By: By:
------------------------------------ -------------------------------
President and Chief Executive Officer
BY:
------------------------------------
Secretary
CONSENT OF GUARANTOR (PURSUANT
TO SECTION SIX HEREOF)
ALLIANCE BANCORP
BY:
------------------------------------
Chairman
BY:
------------------------------------
Secretary
5
<PAGE>
Exhibit No. 23. Consent of KPMG Peat Marwick LLP
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Alliance Bancorp:
We consent to incorporation by reference in the Registration Statement (No. 36-
3811768) on Form S-8 of Alliance Bancorp of our report dated January 23, 1998,
relating to the consolidated statements of financial condition of Alliance
Bancorp and subsidiaries as of December 31, 1997 and September 30, 1996, and the
related consolidated statements of operations, changes in stockholders' equity,
and cash flows for the year ended December 31, 1997, each of the years in the
two year period ended September 30, 1996, and the three months ended December
31, 1996, which report appears in the December 31, 1997 annual report on Form
10-K of Alliance Bancorp.
KPMG Peat Marwick LLP
Chicago, Illinois
March 11, 1998
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